T+2: Difference between revisions

The rules or customs in financial markets are for securities transactions to be settled within a commonly understood settlement period. The most common current settlement period for securities transactions is two business days after the day of a transaction - which is widely abbreviated to T+2, which is the shorthand for trade date plus two days. On settlement, the seller must produce the security's certificate and executed share transfer form in exchange for payment from the purchaser. Some countries now dispense with the requirement that a physical stock certificate be produced, and have adopted electronic settlement systems.

Similarly, T+3 is the previous convention of trade date plus three days, T+1 is one day, etc.

The first day of a two-day settlement period (T+2) starts on the business day following the day that a security was purchased or sold. For example, if a stock is purchased on Friday at any time before the close of trade on that day, Saturday, Sunday and public holidays are not considered business days, so the two-day clock starts running on the next business day. A payment or check must arrive at the broker's office by the close of business on Tuesday, unless a public holiday delays the settlement day.

The rationale for the delayed settlement is to give time for the seller to get documents to the settlement and for the purchaser to clear the funds required for settlement. T+2 is the standard settlement period for normal trades on a stock exchange, and any other conditions need to be handled on an “off-market” basis.

During the 1700s the Amsterdam Stock Exchange had close links with the London Stock Exchange and they would often list each other's stocks. To clear the trades, time was required for the physical stock certificate or cash to move from Amsterdam to London and back. This led to a standard settlement period of 14 days which was the time it usually took for a courier to make the journey on horseback and by ship. Most exchanges continued to use the same model over the next few hundred years.

With the advent of new technology in the 1970s and 1980s there was a move to reduce settlement times, and settlement dates in most exchanges reduced to five days (known as T+5), then three days (T+3). In 2017, the move by most stock exchanges is towards adoption of T+2 (trade date plus two days). For example, the United States adopted T+2 in September 2017.^[1]

The two-day settlement period applies to most security transactions, including stocks, bonds, municipal securities, mutual funds traded through a brokerage firm, and limited partnerships that trade on an exchange.^[2]

Government securities, stock options, and options on futures contracts settle on the next business day following the trade. Futures contracts themselves settle the day of the trade.

This article incorporates text from this source, which is in the public domain: About Settling Trades in Three Days, United States Securities and Exchange Commission

• http://www.hsbcnet.com/gbm/global-insights/insights/2013/eu-to-reduce-settlement-period-for-securities.html