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From order to settlement: T+1

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Trade today, settle the next business day. Learn the delivery deadline and the dividend dates.

Agreement first, delivery afterwards

A trade has two dates and they do different work. The trade date is the day the order is executed and the bargain is struck: price, quantity and capacity are all fixed at that moment, and both sides are bound. The settlement date is the day the money and the securities actually change hands. The agreed execution price does not follow later market moves, but the market value of the position can change before settlement. Settlement completes delivery and payment.

For most broker-dealer transactions, regular way settlement is one business day after the trade date, written as T+1. The count is in business days, so a Friday trade settles on the following Monday if that Monday is a business day, and a holiday pushes it further. The SEC shortened the cycle to one business day to reduce the credit, market and liquidity risks in the gap: each day before settlement is a day either side could fail to pay or deliver, although the agreed price stays fixed.

The cycle is a default. The rule lets the parties settle on another date if they expressly agree to it at the time of the trade, and an agreement to settle on the trade date itself is called cash settlement, used when a seller needs the proceeds or a buyer needs the securities that day. A question describing an ordinary trade with no such agreement is describing regular way settlement.

For an ordinary dividend below 25% of share value, with timely notice and a business-day record date, the normal ex-dividend date is the record date. A regular-way buyer on that ex-date buys without that dividend; buying before it permits settlement by the record date. Large distributions and other exceptions have different dates, so check the announced ex-date.

Exam terms

Trade date
The day the order is executed and the terms are fixed.
Settlement date
The day money and securities actually change hands.
Regular way
The standard cycle: one business day after the trade date.
Cash settlement
Settlement on the trade date itself, which the parties must expressly agree to when they trade.
Business day
A settlement business day; skip weekends and settlement holidays.
Owner of record
The registered holder shown on the issuer books. In street name, an intermediary is the record holder and the customer is the beneficial owner.

One trade, start to finish

  1. Order placed

    The customer instructs the firm

  2. Execution

    Price and quantity are fixed

  3. Trade date

    The executed trade binds both sides

  4. Settlement, T+1

    Cash and securities change hands

  5. Position recorded

    Directly or through street-name records

Execution first; regular-way delivery and payment one business day later.

Try it: Work out the settlement date for three regular way trades without a calendar in front of you: one executed on a Tuesday, one on a Friday, and one on the business day before a Monday holiday. Then say what would change in all three answers if the parties had agreed to cash settlement instead.

The ruleMost broker-dealer transactions settle regular way on T+1, unless the parties expressly agree another date when they trade; cash settlement is an agreed same-day settlement.

What actually moves at settlement

Book-entry holdings are electronic records rather than paper certificates. Treasury marketable securities use book-entry form and may be held directly through TreasuryDirect or indirectly in the commercial book-entry system. For a stock held in street name, the issuer register shows an intermediary and the broker records the customer as beneficial owner.

Physical stock or bond certificates can still represent ownership where available; they must be safeguarded and may need delivery to a broker or transfer agent for a sale. Under T+1 a seller holding paper may need to get the certificate to the broker earlier than before, because delivery is due one business day after the sale. Direct registration records the investor on the issuer books without a paper certificate. Distinguish how ownership is recorded from the deadline for settling a trade.

Settlement is not the same deadline as payment in a cash account. Regulation T gives the customer one payment period to pay for a purchase in full, and defines it as the settlement cycle plus two business days: three business days after the trade under T+1. A Thursday purchase settles Friday, and the payment period ends the following Tuesday.

The closest contrast

Trade date: agreement.

Settlement date: money and securities move.

The distinction decides who is entitled to a dividend and who bears the market risk. The buyer is bound from the trade date, so a price fall is already theirs, and settlement completes delivery and payment. In street name, the customer is a beneficial owner rather than the issuer record holder.

Worked example

A customer buys 100 shares regular way on a Thursday, and the same customer wants to know when the money leaves the account and when a Friday sale would settle.

  1. The Thursday trade is executed and the price is fixed. Both sides are now bound, with delivery and payment due at settlement.
  2. Settlement is one business day later, so the cash leaves the account and the shares arrive on the Friday.
  3. A sale executed on the Friday itself settles on the following Monday, because Saturday and Sunday are not business days and the count runs in business days only.
  4. If a market holiday fell on that Monday, settlement would move to the Tuesday, for the same reason.
  5. Had the parties agreed to cash settlement, each of these trades would have settled on the day it was executed, so the two dates would be the same in those examples.

Check yourself

Try a question, then read the explanation to review the rule.

Opening your study record…

Same rule, new context

Opening your study record…

Summary

  • The trade date fixes the terms; the settlement date moves the money and the securities.
  • Regular way settlement is one business day after the trade date, counted in business days; the shorter cycle cuts the risk in the gap.
  • Settling on the trade date (cash settlement) needs both parties’ express agreement at the time of the trade.
  • Record ownership and beneficial ownership differ. For ordinary dividends, use the announced ex-date and the settlement cycle to determine entitlement.
  • A paper certificate must reach the broker sooner under T+1, and a cash-account purchase is paid within the Regulation T payment period, T+3.

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