New T+1 settlement rules: How investors benefit

James Royal, Ph.D.

American financial markets are making a big change on May 28, when they speed up settlement times from two days to one day. The change – called T+1 settlement – ensures that stock trades and other financial moves will close faster and that investors get their money or securities timely.

Here’s how investors stand to benefit from the new T+1 settlement rules and the potential risks.

What is T+1 settlement?

T+1 settlement is the closing of financial transactions in one business day. For example, if a trade happens on a Monday, it will be settled on Tuesday, with traders officially being credited their cash or securities and freely able to exchange them without a potential penalty.

“It will make our market plumbing more resilient, timely, and orderly,” said Gary Gensler, SEC chair. “Further, it addresses one of the four areas the staff recommended the Commission address in response to the GameStop stock events of 2021.”

The volatility of GameStop stock roiled markets and caused some brokers, including Robinhood and Interactive Brokers, to restrict trading in the shares briefly.

The U.S. securities markets have been speeding up the settlement process for years. In 1993, the Securities and Exchange Commission (SEC) created a standard settlement period of three business days (T+3), down from the customary practice of five days. Then in 2017 the SEC again reduced the settlement period to two days (T+2), before the T+1 period introduced in 2024.

Better technology enables faster settlement, but it’s also driven by “a preference by investors and advisors to shorten the T+2 settlement standard,” says Daniel Milan, investment advisor representative and managing partner, Cornerstone Financial Services in Southfield, Michigan.

The benefits of T+1 settlement

The increased speed of settlement should help investors in a variety of ways, say investment advisors.

  • Faster access to cash and securities: With a faster closing period, trades will become official sooner. For buyers, the change means they’ll own their securities sooner, and for sellers, they know they have their cash sooner and will be able to invest it sooner, if they’re trading in a cash account, as opposed to a margin account.

  • Efficiency: A shorter settlement cycle helps markets gain efficiency, increasing liquidity and making shares available for trading sooner. Plus, it helps align U.S. markets with international markets. “As our markets align with these global standards, it makes trading across international markets more efficient and attractive,” says Jason Steeno, president of CoreCap Investments and CoreCap Advisors in Southfield, Michigan.

  • Lower costs: “Longer settlement cycles tend to require financial institutions to spend more on risk management and back-office processes that come with a longer settlement cycle,” says Steeno.

  • Increased financial stability and reduced risk: Shorter settlement lowers the risk to processing transactions. “Risk is significantly reduced with shorter settlement periods as a result of less price-value movements in securities during the transaction,” says Steeno.

Risks of T+1 settlement

The increased speed of settlement could have some negative effects, although those are more likely to be short term as investors and firms get used to the system.

  • Increase in failed settlements: In the short term, the market may see an increase in trades that fail to settle, says the SEC, as brokers and others get used to the faster speed and processes needed to close transactions in a timely manner.

  • Shorter time to correct mistakes: With trades settling faster, investors will now have “a shorter time frame to correct any trade mistakes or cost basis adjustments,” says Milan.

  • Margin calls may be faster: For those using margin accounts, a margin call may come faster and be closed sooner. These investors may need to act faster to prevent a broker from selling off their securities to meet the margin call.

  • Less time to deposit cash: Similarly, if you transfer cash from a bank to buy securities, you’ll have less time to get it to the broker. “A delay in money moving from their bank could result in them not meeting the new, shorter settlement date,” says Steeno.

The best brokers for day traders may help clients mitigate some of these potential challenges.

Bottom line

While larger investors may see more effects from the T+1 settlement, it’s unlikely to cause significant changes for investors, especially long-term buy-and-hold investors. So despite the potential benefits and risks, the average investor “will likely not notice any change,” says Milan.

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