From T2 to T1: What To Expect Now That Trades Will Settle in Just One Day

We live in an age where we expect next-day – or even same-day – delivery when we buy anything online. It might surprise you that speedy delivery hasn’t applied to securities – until now.

The investment settlement cycle, which is the time between when a trade is placed electronically, and when the securities, or the sale proceeds, materialize in your account, has been two business days since 2017. On May 27 in Canada and May 28 in the U.S., though, the settlement period for equities, mutual funds and ETFs, corporate and government bonds, as well as principle-protected notes, will adopt what is called T+1 Settlement, cutting the time to settle a transaction to one business day from two. The change will make trading more efficient for investors and other market participants by giving them the proceeds of their trade by the next business day.

Why trades don’t settle right away

If you’re wondering why settlements don’t happen instantaneously, given most orders are now conducted electronically in microseconds, it has to do with managing market risk. While most trades go through without a hitch, the settlement process can get complicated given the volume of trades made daily, potentially involving different time zones and currencies.

The settlement cycle has been getting progressively shorter thanks to advances in technology. The last change to the cycle happened in September 2017 when it dropped from three to two.

These two days – and soon to be one – are used to give the seller or their representative time to gather and transfer documentation, and the buyer time to clear the funds required for the settlement. They also provide some insurance that the purchaser has the money needed for the transaction, especially if they’re counting on a sale of another security to fund the trade.

What does T+1 mean for you?

While most investors may not see much of a difference in the shift to T+1, the change will allow investors to access proceeds from sold positions a day sooner.

Another time you might notice the change is around year-end tax-loss selling. Until now, if you wanted the sale of a stock or bond to settle before the end of the year, you had to initiate the transaction several days before the final closing bell in December. Waiting too long could cause the trade to be settled in the New Year, given all the holidays and market closures. Now, you have more time to close out unwanted positions and have them qualify for the coming year’s tax filing.

The faster settlement timing will have a similar impact on dividend-paying stocks. Currently, you’re eligible to receive a dividend if you buy the shares two trading days before the ex-dividend date, which is the date when the stock starts trading without the right to receive the declared dividend. After the change to T+1, you can still capture the dividend if you buy the shares one business day before the ex-dividend date (although there could be some variations depending on the type of dividend and asset class). A detailed quote will provide you with a company’s dividend details, as will the company’s own investor relations section of its website.

Regardless of whether you’re an active trader or you favour a buy-and-hold approach, there’s not much you need to do to prepare for the change. The buying process won’t change for RBC Direct Investing clients, but those selling will get their payment a day earlier than you would have before this change.