Delivery Requirements and the Settlement Cycle

Every step that follows execution is driven by the settlement clock. The clock tells the customer when cash moves, tells the firm when securities must be delivered, and tells the back office when books must close. The governing standard is the standard-settlement-cycle rule, and the current standard is T+1.

What is the standard settlement cycle for securities transactions?

The standard-settlement-cycle rule prohibits a broker-dealer (BD) from entering a contract that provides for payment and delivery later than one business day after trade date (T+1), unless the parties expressly agree otherwise at the time of the transaction.

• Shortened from T+2 (the previous standard cycle)
• Trade date (T): the business day the trade is executed
• Settlement date (T+1): the business day after trade date when securities and payment change hands
• Covered transactions: equities, corporate bonds, municipal bonds, Exchange-Traded Funds (ETFs), mutual-fund shares processed via National Securities Clearing Corporation (NSCC) Fund/SERV, and limited partnerships that trade on an exchange
• Excluded from the standard-settlement-cycle rule: exempted securities, government securities, municipal securities, commercial paper, bankers' acceptances, and commercial bills

Exception: a firm-commitment underwritten registered offering priced after 4:30 PM Eastern Time (ET) settles T+2 unless the parties agree to a longer cycle.

Think of it this way: T+1 means a trade booked Monday settles Tuesday. The settlement date is when securities leave the seller's account and cash leaves the buyer's, even though the legal price was locked in the day before.

Which products settle on a cycle other than T+1?

Different products have different operational conventions, but most now line up at T+1.

Exam Tip: Gotchas

• T+1 is the current standard cycle. Any claim that "T+2" is the current cycle is outdated; T+2 was the previous standard. Most Series 6 products (equities, corporate bonds, municipal bonds, ETFs, mutual funds via Fund/SERV) all settle T+1.
• Municipal securities are technically EXEMPT from the standard-settlement-cycle rule, yet the industry adopted T+1 for munis by operational convention. A claim that "municipal securities settle T+2 because they are exempt from the standard-settlement-cycle rule" confuses legal exemption with operational practice: munis are exempt from the rule but still settle T+1 by convention.

When must a customer pay for a securities purchase under Regulation T?

The settlement cycle drives a set of downstream deadlines.

• Customer payment deadline: under Regulation T, a customer must pay for a purchase by two business days after the standard settlement date = T+3 in a T+1 world
• Delivery obligation: a selling customer must deliver the security to the BD in good deliverable form by settlement date
• Mutual-fund redemptions: the Investment Company Act requires payment of redemption proceeds within 7 calendar days of tender (a ceiling, not a standard); operational practice via Fund/SERV is T+1
• Variable-contract transactions: purchases and exchanges are processed under the carrier's contract. "Settlement" here means the transfer of units into the contract owner's separate-account sub-account, typically at the next-valuation-date Net Asset Value (NAV)

Exam Tip: Gotchas

• The Reg T payment period is T+3 under a T+1 settlement cycle. The payment period equals standard settlement (T+1) plus 2 business days. Under the previous T+2 cycle it was T+4; the move to T+1 shortened it by one day.
• The 7-day mutual-fund redemption window is a CEILING, not a standard. A fund that settles T+1 via Fund/SERV complies (seven calendar days is the outer limit). A fund that delays beyond seven calendar days without an authorized suspension is in violation. A rep should quote operational T+1 to the customer, not the 7-day statutory maximum.