View source for Finance:T+2

{{Short description|Settlement time for trading stocks}}
In financial markets '''T+2''' is a shorthand for '''trade date plus two days''' indicating when securities transactions must be [[Finance:Settlement|settled]]. 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.  On settlement, the seller must produce the [[Finance:Stock certificate|security's certificate]] and executed share transfer form in exchange for payment from the purchaser. Many 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.

==History==
{{main |Finance:Clearing}}
During the 1700s the Amsterdam Stock Exchange had close links with the [[Company:London Stock Exchange|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 [[Finance:Settlement period|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.{{citation needed|date=July 2022}}

Settlement procedures varied considerably across national stock markets. There were two main types of settlement period used by different countries, either a fixed number of days after the transaction known as ''fixed settlement lag'' or periodically on a fixed date when all transactions up to that date are settled known as ''fixed settlement date''.<ref name="Jordanov">{{cite web |url=https://core.ac.uk/download/pdf/2743014.pdf |title=The Size Anomaly in the London Stock Exchange. An Empirical Investigation |author=Jordan Vassilev Jordanov |date=September 1998 |pages=69–70}}</ref> In France, Italy, and, to some extent, Switzerland and Belgium, as well as some developing countries, the settlement of all transactions took place once a month on a fixed date. This
system was instituted by Napoleon. The last day of trading on which all trades are settled was called the liquidation.  The liquidation took place on the seventh business day preceding the end of the calendar month.<ref name="Jordanov" />

In the United States, the New York Stock Exchange used T+1 in the 1920s, and the American Stock Exchange used T+2 prior to 1953.<ref name="58 FR 52891">{{cite web |url=https://www.govinfo.gov/content/pkg/FR-1993-10-13/pdf/FR-1993-10-13.pdf |title=58 FR 52891 Securities Transactions Settlements |author=Securities and Exchange Commission |date=October 13, 1993}}</ref> These settlement periods were gradually extended to T+5 by the late 1960s as brokerage firms became overwhelmed by the massive volume of securities transactions paperwork awaiting settlement.<ref name="Morris_Page_4">{{cite book |last1=Morris |first1=Virginia B. |last2=Goldstein |first2=Stuart A. |title=Guide to Clearance & Settlement: An Introduction to DTCC |date=2009 |publisher=Lightbulb Press |location=New York |isbn=9781933569987 |page=4 |url=https://books.google.com/books?id=O86DYQgg6v8C&pg=PA4 |access-date=20 November 2022}}</ref>  

Prompted in part by the [[Finance:Black Monday (1987)|Black Monday (1987)]] stock market crash,<ref name="58 FR 52891" /> there has since been a move to reduce settlement times, and [[Finance:Settlement date|settlement date]]s in most exchanges reduced to three days (T+3).<ref name="58 FR 52891" /> In 2017, the move by most stock exchanges was towards adoption of T+2 (trade date plus two days). For example, the United Kingdom adopted T+2 in October 2014 and the United States adopted T+2 in September 2017.<ref>{{cite web |url=https://www.ft.com/content/67f95f76-5b56-11e3-848e-00144feabdc0 |title=UK share settlement to be cut to two days |author=Philip Stafford |date=December 3, 2013}}</ref><ref>{{cite web|url=https://www.sec.gov/news/press-release/2017-68-0|title=SEC Adopts T+2 Settlement Cycle for Securities Transactions|publisher=Securities and Exchange Commission|date=March 22, 2017|accessdate=August 2, 2017}}</ref>

Indian stock exchanges plan to move to T+1 starting in 2022.<ref>{{cite web|url=https://www.business-standard.com/article/markets/stock-exchanges-to-start-t-1-settlement-cycle-from-feb-25-2022-in-phases-121110801067_1.html|title=Stock exchanges to start T+1 settlement cycle from Feb 25, 2022 in phases|website=Business Standard (India)|date=November 9, 2021|accessdate=November 9, 2021}}</ref> The US and Canada are targeting a transition to T+1 in the first half of 2024.<ref name="osc-24-318">{{cite web |url=https://www.osc.ca/en/securities-law/instruments-rules-policies/2/24-318/csa-staff-notice-24-318-preparing-implementation-t1-settlement#N_1_1_1_2_ |author=Canadian Securities Administrators |title=CSA Staff Notice 24-318 – Preparing for the Implementation of T+1 Settlement |date=February 3, 2022}}</ref>

==Operation==
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.<ref>{{cite web |title=Title 17: Commodity and Securities Exchanges.  §240.15c6-1 Settlement cycle |url=https://www.ecfr.gov/cgi-bin/text-idx?node=se17.4.240_115c6_61&rgn=div8 |website=Electronic Code of Federal Regulations (eCFR) |access-date=11 April 2021 |language=en |date=29 March 2017}}</ref>

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.

==Application==
The two-day settlement period applies to most security transactions, including [[Finance:Stock|stock]]s, [[Finance:Bond|bonds]], municipal securities, mutual funds traded through a [[Finance:Brokerage firm|brokerage firm]], and [[Social:Limited partnership|limited partnership]]s that trade on an [[Finance:Stock exchange|exchange]].<ref>{{cite web|url=https://www.reuters.com/article/us-usa-sec-settlement/sec-shortens-settlement-cycle-for-securities-trades-idUSKBN16T1SW|title=SEC shortens settlement cycle for securities trades|author=Sarah N. Lynch|publisher=Reuters|date=March 22, 2017|accessdate=September 6, 2017}}</ref>  Two-day settlement has also been the convention in the off-exchange [[Finance:Foreign exchange market|foreign exchange market]] well before exchanges moved to this convention.

Government securities, stock options, and [[Finance:Option|options]] on [[Finance:Futures contract|futures contract]]s settle on the next business day following the trade or T+1. [[Finance:Futures contract|Futures contract]]s themselves settle the day of the trade.

== References ==
{{Reflist}}

{{USGovernment |url=https://www.sec.gov/investor/pubs/tplus3.htm|title=About Settling Trades in Three Days|agency=United States Securities and Exchange Commission}}

==External links==
* [https://web.archive.org/web/20131029191245/http://www.hsbcnet.com/gbm/global-insights/insights/2013/eu-to-reduce-settlement-period-for-securities.html EU to reduce settlement time for securities], HSBC (2013)

[[Category:Securities (finance)]]
[[Category:Share trading]]
[[Category:Settlement (finance)]]

{{Sourceattribution|T+2}}