Market Prepares For T+2 Settlement Cycle Beginning Next Week

A new two-day securities settlement cycle will begin next Tuesday following the Labor Day weekend. Earlier this year, the Securities and Exchange Commission (SEC) voted unanimously to shorten the timeframe it takes for stock and bond trades to settle from three business days to two business days. In short, if an investor sells shares of a particular stock on Tuesday, the transaction would now settle on Thursday, rather than on Friday.

According to the SEC, ‘this amended rule is designed to enhance [market] efficiency, reduce risk, and ensure a coordinated and expeditious transition by market participants to a shortened standard settlement cycle.’

“It is finally time to say hasta la vista to the antiquated T+3 settlement cycle,” acting SEC Chairman Michael Piwowar said.

The shortened cycle, he added, will reduce “the time horizon for risk exposures” and also “should improve capital efficiency and enhance the resilience of the national clearance and settlement system.”

The U.S. joins many European nations that have adopted the T+2 cycle back in May of 2014. Besides applying to U.S. stocks and bonds, the new changes will also apply to exchange-traded funds, certain mutual funds, municipal securities and limited partnerships that trade on exchanges.