T+2 and Counting

T+2 and counting?
Ah, remember the “good old days” when trade settlement timing was a leisurely T+5? In other words, from the time a security trade was executed, if you were the buyer, you had a full five business days to pay for your securities. Of course, you also didn’t take ownership of the securities until that time. On the flip side, if you sold securities, you didn’t receive payment until the fifth day, so if you needed cash for any reason, you really had to plan ahead. This extended process made more sense when paper stock certificates and paper checks were delivered by couriers and extensive manual administrative activity and reconciliations were needed.

One thing to note; the clock doesn’t start running until the day after the trade and it counts business days only. In other words, under T+5, if you traded on Thursday, the clock started on Friday, and the trade settled on the next Thursday, a full calendar week later.

Getting faster all the time
Then in 1995, the SEC shortened the settlement cycle significantly to T+3. Fast forward twenty-two years (and many technological advances) later, and welcome to T+2. The SEC announced in March 2017 that it would move to T+2 settlement for most securities trades, effective September 5, 2017. This was based on an extensive study and set of recommendations from an Industry Steering Committee (ISC) composed of approximately 20 participants across key market segments.

Good for the markets and investors
Recommendations were based on comprehensive research by the Boston Consulting Group and found that moving to faster settlement periods will enhance efficiency and reduce risk for the markets overall and for market participants. It also makes the U.S. more consistent with other markets that are moving or have already moved to T+2, including London, most European Union markets, Hong Kong, South Korea and Australia, or are contemplating a move, as in Canada and Japan. And don’t worry, transactions in the huge U.S. Treasury securities market already settle on a T+1 basis, so this acceleration to T+2 should not present great difficulties.

What does it all mean for you?
You may not even notice it, but there are a couple of items to note. If you are selling a security, you’ll receive payment, and have cash available, one day sooner than previously. On the other side of the transaction, however, if you’re the purchaser, your payment will be due a day sooner. You may see that we effect sales in your account to fund purchases of securities on the same day to meet the new timing requirements. As always, Klingenstein Fields Advisors will be watching carefully to make sure transactions go smoothly.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personal investment advice. KF Advisors is neither a law firm nor accounting firm, and no portion of its services should be construed as legal or accounting advice. 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. A copy of our current written disclosure statement discussing our advisory services and fees is available upon request or by clicking here. Please read the expanded disclosures in the linked report.