Beginning on June 7, 1995, investors must settle their security transactions in three business days rather than five. This shortened settlement cycle is known as "T+3" - shorthand for "trade date plus three days."
This new rule means that when you buy securities, your payment must be received by your brokerage firm no later than three business days after the trade is executed. And if you sell securities, your brokerage firm must receive your securities certificate no later than three business days after you authorized the sale.
The U.S. Securities and Exchange Commission developed this brochure to address frequently asked questions about why the settlement cycle was shortened and to highlight issues you should consider in preparing for three-day settlement.
"Why the change?"
Unsettled trades pose risks to our financial markets, especially when market prices plunge and trading volumes soar. This happened when the stock market fell by over 500 points on October 19, 1987. In the hours and days following this drop, our financial markets were threatened by doubts about whether securities firms and investors hit by sizable losses would be able to pay for their transactions. By reducing the settlement cycle from five to three business days, the SEC has lessened the amount of money that needs to be collected at any one time, and strengthened our financial markets for times of stress.
"What security transactions are covered?"
Most security transactions, including stocks, bonds, municipal securities, mutual funds traded through a broker, and limited partnerships that trade on an exchange, must settle in three days. Government securities and options will continue to settle as they have in the past - one day following a purchase or sale.
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