T+1 is Coming Soon

Published: May 21, 2024

T+1 Defined

A recent topic in the financial news provided information about the upcoming change in trade settlement timing to T+1. If you have followed trades your advisor has made on your behalf, you will notice there are two parts to the trade process. The day the trade is executed is considered the transaction date. This is represented by the “T” in “T+x.” The “x” indicates the number of days following the transaction date it takes for the trade to “settle.” The settlement date is when payment must be made for a purchase, or when securities must be legally transferred and recorded in the name of the new owner for a sale. As technology has advanced, the difference between the two dates has steadily declined. In the early 1990’s, the trade settlement period went from T+5 to T+3. In 2017, it dropped to T+2, and on May 28, 2024, the settlement period will fall to T+1.

Securities Affected

According to the SEC, the new T+1 settlement period applies to the same securities transactions currently covered by the T+2 settlement cycle. These include transactions for stocks, bonds, municipal securities, exchange-traded funds, certain mutual funds, and limited partnerships that trade on an exchange. Real estate investment trusts will also shift to T+1 settlement. Note that the settlement time for U.S. government bonds is already T+1, so market participants have ample experience with initiating and completing transactions in that timeframe.

How Will T+1 Work?

If a trade is executed during market hours on Wednesday, for example, then it will settle the next business day, which would be Thursday, unless it happens to be a market holiday. Payment is due on the settlement date, and securities must be delivered (most likely electronically). If a trade is executed on a Friday, it will settle the following Monday, provided the markets are open.

What this Means for Investors

Don’t worry, T+1 is unlikely to significantly impact most investors as the majority of brokerage firms, including our primary custodian, Charles Schwab & Co., Inc., typically require cash or margin borrowing capacity to buy, or the security to be sold to be in your account prior to executing a transaction. This ensures that the broker has the necessary funds or security in hand to complete the transaction, eliminating the need to obtain the funds or the security from the investor on the settlement date. Assuming the security is held electronically, T+1 delivery of securities should not pose an issue. However, in the rare event a physical security is held, the timing could be tight for delivery, and the holder may need to plan ahead. The shorter timeframe may influence when investors choose to trade, particularly to receive a dividend or if they wish to participate in proxy votes, which are the rights of the holder of record on a certain date. Furthermore, trading, investment, and tax concerns in a T+1 environment could also influence the timing of a trade. Finally, regulators will appreciate the reduction in systemic financial risk from shorter settlements and smaller inter-broker liabilities outstanding.

At Klingenstein Fields Advisors, we carefully factor these and other considerations into our portfolio management decision making. We welcome the occasion to discuss regulatory changes, the current market situation, our perspectives, and what they mean for your portfolio.

Important Disclosures

This material is provided for informational or educational purposes only and should not be construed as investment, accounting, tax or legal advice. Always consult a financial, tax and/or legal professional regarding your specific situation. This communication is not intended as a recommendation or as investment advice of any kind. It is not provided in a fiduciary capacity and may not be relied upon for or in connection with the making of investment decisions. Nothing herein constitutes or should be construed as an offering of advisory services or an offer to sell or a solicitation to buy any securities or a recommendation to invest in any specific investment strategy. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future returns. The views expressed herein are as of a particular point in time and are subject to change without notice. The information and opinions presented herein are general in nature and have been obtained from, or are based on, sources believed by Klingenstein Fields Advisors (“KF Advisors’) to be reliable, but KF Advisors makes no representation as to their accuracy or completeness. Although the information provided is carefully reviewed, KF Advisors cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided. KF Advisors represents two investment advisers registered with the Securities and Exchange Commission: Klingenstein, Fields & Co., L.P. and KF Group, LP. If you are a KF Advisors client, please remember that it remains your responsibility to advise KF Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.