T+1 settlement: Definitions, pros, cons & why it's important for investors

When trading or selling on the market, it can seem like your digital transactions happen instantly. However, it actually takes some time for the trade to settle. The process, known in shorthand as a T+1 settlement (or similar), determines how many days after the trade that ownership officially transfers and funds are exchanged.

These time frames—T+0, T+1, T+2 and so on—are crucial to understand because they affect your cash availability, dividend eligibility and regulatory compliance. The standard settlement used to be three days after the trade, but it's generally faster now depending on the asset you're dealing with. However, it's still not instant.

Whether managing liquidity, avoiding unsettled trade violations or strategizing for tax implications, understanding security settlements is very important for making informed decisions and avoid unnecessary risks.

The settlement cycle, as defined by industry standards and further detailed in the DTCCs T+1 Conversion Guide, is the time between the execution of a trade and when the buyer officially receives their securities and the seller receives payment. This process ensures trades are properly cleared, reducing risk and ensuring the smooth functioning of financial markets.

Settlement cycles matter because they impact cash availability, dividend entitlements and regulatory compliance. Failing to understand them can lead to issues such as trading violations or unexpected delays in accessing funds.

It's a shorthand for the day of the trade (T) and the number of days for settlement. Markets are gaining efficiency thanks to technology that's faster but still secure, and the standard settlement time frame has shifted based on the kind of asset you're working with:

• T+0 settlement. The trade and settlement happen on the same day. This is common for cryptocurrency and some options trades.
• T+1 settlement. The securities and cash exchange happens one business day after the trade. U.S. equities shifted to this standard in 2024. Most stocks, ETFs and bonds use this basis.
• T+2 settlement. Settlement happens two business days after the trade date. This was phased out in 2024.
• T+3 settlement. Once the standard for stock trades, the three-day settlement was phased out in 2017.

The waiting period for trades to settle has been tightening over the past 30 years. Here's a quick look at the history:

The SEC endorsed the move to T+1 to boost market resilience and protect investors, outlining the specific rule changes in their Small Entity Compliance Guide. A shorter settlement cycle minimizes the time buyers and sellers are exposed to credit and market risks, giving the overall financial system more stability. The SEC mandated the transition to T+1 settlement for most US securities, with the rule changes going into effect on May 28, 2024.

It also means investors receive proceeds from sales more quickly, improving liquidity and the ability to reinvest.

As technology continues to advance, investors may push for T+0 settlement, in which trades settle the same day or could potentially settle instantly. But for now, T+1 is a major step forward in reducing risk and improving liquidity across the system.

While both stocks and mutual funds now settle under a T+1 timeline, the process for each differs because of the way these assets are traded and processed. Here are the key differences to know:

• Trade execution timing. Unlike stocks, which trade continuously throughout the day on exchanges, mutual fund transactions occur once per day at the fund's net asset value (NAV), which is only calculated after the market closes.
• Settlement process. The mutual fund settlement process works differently because mutual funds don't involve direct exchange trading like stocks do. Instead, settlement happens between fund companies and investors via financial intermediaries, such as brokerage firms or retirement plan administrators.
• Impact on liquidity. Investors selling stocks on a T+1 basis receive their proceeds the next business day. Mutual fund investors do, too, but because the price is determined by NAV at the end of the trading day, they won't have access to the proceeds until then.

Related: What is portfolio rebalancing? Tips to maintain your target investment mix.

The shift to T+1 settlement introduced new operational deadlines that impact investors. The shift to a T+1 settlement cycle for securities brings two key advantages to investors, brokers and financial institutions in addition to efficiency. By reducing the time between trade execution and final settlement, the new standard accelerates access to funds and lowers risk for everyone involved.

Investors selling securities now receive their cash one business day earlier, allowing for quicker reinvestment opportunities or liquidity for withdrawals. This change benefits retail and institutional investors alike, particularly those engaged in active trading or short-term portfolio management.

In T+2 or T+3 systems, there's more time for either the buyer or seller to default or for market volatility to change the stakes. In that time span, there's a risk the deal could fall through. Having a T+1 settlement limits the risk to just one day. Market volatility can impact unsettled trades. A shorter cycle limits exposure to price fluctuations that might otherwise affect trade obligations.

While T+1 settlements have advantages, they have some downsides for certain market participants. Investors, traders and financial institutions need to be aware of these potential drawbacks so they can be prepared for risks and adjust their planning and timeline appropriately. Further detailed in the SECs Risk Alert on Shortening Securities Transaction Settlement cycle.

• Allocations and prime brokerage. Trade files must be submitted on the trade date (T+0) before the industry-recommended deadline of 7 p.m. U.S. Eastern.
• Trade confirmations and affirmations. All trade confirmations and trade affirmations must be completed on the trade date (T+0) before the industry-recommended deadline of 9 p.m. U.S. Eastern.
• Clearing breaks. Any clearing breaks must be resolved on the trade date (T+0).

With a shorter settlement window, institutional investors, hedge funds and other traders relying on margin or borrowed funds have less time to arrange financing. For OTC equity derivatives and swap trades, clients can benefit from a shorter settlement timeframe of T+1.

• How to mitigate: Ensure cash or securities are available ahead of time to meet settlement obligations. Use real-time cash management tools to avoid funding gaps.

Retail investors funding trades via ACH bank transfers may face delays because ACH transfers typically take up to three business days to clear and can take longer than the T+1 settlement window.

• How to mitigate: Use wire transfers or brokerage sweep accounts for quicker funding. Keep a cash buffer in brokerage accounts to cover trades without delays.

Investors engaging in corporate actions such as tender offers or rights issues now have less time to respond before their trades settle.

• How to mitigate: Stay informed about corporate action deadlines and submit instructions promptly. Work with financial advisors or brokers to anticipate necessary transactions ahead of time.

Industry leaders and organizations like the Depository Trust & Clearing Corporation (DTCC) already are exploring the feasibility of T+0 or real-time settlement, where trades settle the same day or even instantly. While T+0 would eliminate overnight settlement risk—further reducing counterparty exposure and margin requirements—it would require real-time clearing and faster payment systems than are widely available now. This could be challenging for existing market structures, and some financial institutions are concerned about their own liquidity constraints because buyers and sellers would need immediate access to cash and securities.

Q: What's an example of a T+1 settlement?

A: If you buy shares of a stock on Monday, the transaction will settle on Tuesday, meaning the shares officially transfer to your account, and the payment is completed.

Q: What is settlement risk?

A: Settlement risk is the possibility that one party in a trade fails to deliver cash or securities by the settlement date, potentially causing financial loss or market disruption.

Q: What happens if you sell a stock before it settles?

A: Selling a stock before it settles can result in a good faith violation or free-riding violation, depending on your brokerage's policies, as you're using unsettled funds to trade.

Q: How does T+1 settlement affect different types of securities?

A: T+1 applies to most U.S. securities, including stocks, corporate bonds and ETFs while mutual funds and certain fixed-income securities may still follow different settlement timelines.

Q: What are the implications of T+1 for international trades?

A; International investors must be aware of varying settlement cycles to avoid funding and timing mismatches; while the U.S. moved to T+1 on May 28, 2024, the slightly earlier May 27, 2024, transition in Canada and Mexico, as outlined by the [Canadian Capital Markets Association] and the [Contraparte Central de Valores] illustrates the complexities that can arise when trading across borders.

Q: How can investors prepare for T+1 settlement?

A: Investors should ensure funds are available before trading, use faster funding methods like wire transfers instead of ACH and monitor settlement timelines closely to avoid violations.

Q: What should investors do if there are problems with a trade settlement?

A: Contact your broker or financial advisor immediately to resolve the issue, as failed settlements may result in penalties, trade cancellations or delays in accessing funds or securities.

The transition to T+1 settlement reflects a broader shift toward faster and more efficient financial markets, but it requires investors and institutions to adapt their trading, funding and risk management strategies. By planning ahead and leveraging technology, market participants can navigate the new settlement landscape effectively.

Investing plays an important role in your overall financial strategy. Consider meeting with your local Thrivent financial advisor to understand how settlement periods may impact your cash flow and how you can plan for it.