7 Things to Know About T+1 Settlement

Placing a trade can feel like a one-time, instant process. But every trade involves two important dates that investors should understand: transaction and settlement.

The transaction date is the day a trade is executed. The settlement date is when that trade becomes official. It's also the date when payment is due for purchases, when securities sold must be delivered, and when the security's transfer agent verifies the new shareholder and removes the former one.

In May 2024, settlement cycles for most U.S. securities trades were shortened from two business days to one. For many investors, that event had little or no noticeable impact. But for others—particularly active traders—the settlement cycle can significantly influence portfolio and trading decisions and even tax planning (more on this below).

Known as T+1—"transaction date plus one business day"—this transition put trade settlement for stocks, bonds, and most related assets on the same one-day timetable as options and futures contracts. Two-day securities settlement (or T+2) had been the standard since 2017, when the Securities and Exchange Commission (SEC) amended its rules to shorten settlement from three days.

How does T+1 affect investors and their investments? Here are few key things to know:

1. Why were settlement cycles shortened? Faster technology and evolving investor preference were the primary drivers. "Shortening the settlement cycle also will help the markets because time is money and time is risk," Gary Gensler, then-chairman of the SEC, explained at the time.
2. What does T+1 mean for most investors? Generally, very little, because many brokerage accounts today—including those at Schwab—require sufficient cash or margin to cover any securities trades at the time they're placed. And unlike decades ago, most investors now allow their brokerages to electronically hold their securities, eliminating the reliance on paper certificates that required physical delivery. For some investors, though, faster securities settlement could influence future trading, portfolio, and tax strategies (see below).
3. Which securities were affected by the move to T+1? According to the Financial Industry Regulatory Authority (FINRA), the following U.S.-traded securities shifted from T+2 to T+1:
   • Stocks
   • Corporate and municipal bonds
   • Exchange-traded funds (ETFs)
   • Certain mutual funds
   • Real estate investment trusts (REITs)
   • Master-limited partnerships (MLPs)

Additionally, most U.S. government bonds were already settling on a T+1 time frame prior to the change.

4. How does T+1 settlement work? A securities trade must be settled on the next business day as long as it isn't a market holiday. A trade placed on Monday is settled on Tuesday. One placed on Friday would settle the following Monday.
5. How does T+1 influence investment decisions? In some specific cases, settlement timing matters. Some investors may need to own shares by a specific date to participate in proxy votes or shareholder meetings. In these cases, shorter settlement cycles can help them plan.
6. Does T+1 affect margin interest? In certain cases. For example, investors trading on margin who place a trade but then need to sell money market funds (MMF) to cover the purchase must ensure the proceeds are available by the settlement date to avoid a margin interest charge. Investors should consult their brokerage's rules.
7. Are there potential tax considerations? Because of T+1 settlement, investors have half the time to make or correct cost basis elections after a trade. Once a trade settles, cost basis—total initial investment, commissions or fees, and decisions on how to collect dividends and distributions—is locked in for tax purposes.