On May 28, the new standard for trade settlement will become the next business day after a trade, or T+1.
As it stands now, the settlement date occurs two business days after the trade date (T+2), but recent rule amendments from the Securities and Exchange Commission and conforming FINRA rule changes will soon make that cycle one day shorter, FINRA notes in just-released guidance.
The rule amendments, approved by the SEC last Feb. 15, shortened the standard settlement cycle for most broker-dealer transactions.
The May compliance date for the rule is earlier than the Investment Adviser Association in Washington thought it should be, Karen Barr, IAA’s president and CEO, told ThinkAdvisor in a recent interview. The rule “is a big deal,” she said.
As FINRA explains, the trade date is the day an order to buy or sell a security is executed; the settlement date is the day the order is finalized and on which funds and the securities must be delivered.
This isn’t the first time a settlement change has occurred.
“In 2017, the SEC shortened the settlement cycle from T+3 to T+2,” FINRA explains. “The move to T+1 reflects improvements in technology that allow trades to settle more quickly. With most trading and banking activity occurring online, extra days to physically deliver securities or funds are no longer needed.”
The T+1 rule amendment applies to the same securities transactions currently covered by the T+2 settlement cycle, FINRA states.
These include transactions for stocks, bonds, municipal securities, exchange-traded funds, certain mutual funds and limited partnerships that trade on an exchange.