For many years, markets operated on a "T+5" settlement cycle. In 1995, the U.S. Securities and Exchange Commission reduced the settlement cycle from five business days to three business days, "T+3" , which in turn lessened the amount of money that needs to be collected at any one time and strengthened our financial markets for times of stress.
T+3 Settlement Cycle
Trade Date (T)
The post-trade clearance and settlement cycle begins on the date the trade is executed. On this date, trade details for equities, and corporate and municipal bonds are electronically transmitted by participants to the National Securities Clearing Corporation (NSCC) for processing, the majority of which are in real-time. NSCC is a subsidiary of the Depository Trust & Clearing Corporation (DTCC). NSCC sends to participants automated reports, which are legally binding documents that show trade details – including share quantity, price and security. These reports confirm that transactions have entered the clearance and settlement processing stream.
NSCC's guarantee of settlement generally begins midnight between T+1 and T+2. At this point, NSCC assumes the role of central counterparty, taking on the buyer's credit risk and the seller's delivery risk. This guarantee eliminates uncertainty for market participants and inspires public confidence.
NSCC issues broker/dealers summaries of all compared (i.e., “cleared”) trades, including information on the net positions of each security due or owed for settlement.
T+3 is settlement – the delivery of securities to net buyers and payments of money to net sellers. Broker / dealers instruct their settling banks to send or receive funds (through the Federal Reserve System) to / from the Depository Trust Company (DTC) as NSCC's agent. Securities generally do not change hands physically. DTC transfers ownership between broker/dealers' accounts by book-entry electronic movements.
The Depository Trust & Clearing Corporation (DTCC), released a business case developed by The Boston Consulting Group (BCG) studying the impacts of potentially shortening the trade settlement cycle in the U.S. financial markets for equities, corporate and municipal bonds and unit investment trust (UIT) trades on October 4, 2012. The business case examines the costs and benefits of shortening the trade settlement cycle for these instruments in the U.S. financial markets from T+3 to T+2 or T+1, but does not make a recommendation for any change, and was carried out with the guidance of SIFMA. View Study (PDF)
SIFMA provided an advisory role on the project and helped assemble a Steering Committee to advise on the project to make sure industry views were recognized and addressed. SIFMA was not predisposed to a specific outcome of this study and has not taken a position on changes to the settlement cycle. SIFMA will continue to work with DTCC to socialize the study and facilitate industry dialogue around this issue.
The study builds on work SIFMA did in 2000 on potential changes to the settlement cycle, including identification of building blocks for any chance. View T+1 Business Case Final Report