T+3, refers to the number of days it takes to settle stock in the United States; thus T+3 really refers to the trade day plus 3 days.
Breaking it down, the T stands for transaction date, which is the day the transaction takes place. The numbers 1, 2 or 3 denote how many days after the transaction date the settlement or the transfer of money and security ownership takes place.
An investor buying a security on Monday is not required to pay for that purchase until Thursday, so in essence, the broker has extended a three-day window or extension of credit to the customer. As a result, the customer can still trade while the earlier transaction/s are being cash settled, while making a good-faith promise to fully pay settled funds or deposit securities within the three-day settlement period and not to sell before making such payment.
Shortening the Settlement Cycle
In 1995, as automation and other improvements in the settlement and clearing process, the U.S. equity and bond markets moved the trade settlement date from five days after the trade (T+5) to a date of three days after a trade occurred (T+3). By 2000, the securities industry (led by SIFMA predecessor, the Securities Industry Association) began the planning process for a transition to T+1. Although the transition was put on hold, the industry continued to improve in many of the areas identified as critical in the transition to a shorter settlement date.
After the financial crises of 2008-09, global regulators began to push for higher standards in risk management, including the consideration of a shorter settlement cycle. In 2009, the European Commission mad the decision to transition to a T+2 cycle.
In October 2012, Boston Consulting Group (BCG) released the findings of a study, commissioned by the Depository Trust & Clearing Corporation (DTCC), with the guidance of the Securities Industry and Financial Markets Association (SIFMA), which highlighted the costs and benefits of shortening the settlement cycle for securities transactions in the U.S.
For more information, visit the related page in MarketsReformWiki.
- Settling Securities Transactions, T+3. U.S. Securities Exchange Commission.
- Glossary. CME.
- Boston Consulting Group Completes Study of Potential Impacts of Accelerating Settlement for U.S. Equity Trades. DTCC.
- DTCC Partners with the Industry to Implement T+2 in the U.S.. DTCC.