T + 1 Settlement

As the days in Alaska are getting longer, trading settlement times are getting shorter. For as long as I can remember, the world of securities trading operated on a T+2 cycle. This meant that after a trade was executed, it took three business days (T + 2) for the settlement to occur, where the seller delivers the security, and the buyer delivers the cash. However, the landscape is changing. The US is undergoing a major transition to a T+1 settlement cycle, with an effective date of May 28th, 2024. Let’s delve into what this means and how it will impact the trading world.

 The Rationale Behind the Shift:

Technology and execution improvements have driven this move to a shorter settlement date. Faster communication and electronic record-keeping have significantly reduced the time needed to complete a trade. This streamlined process allows for a quicker settlement, potentially leading to:

• Reduced Settlement Risk: With less time between trade and settlement, the risk of a party failing to deliver (defaulting) is minimized.
• Enhanced Liquidity: Faster settlement frees up cash and securities sooner, allowing for more efficient redeployment of capital.
• Potential for Lower Costs: Reduced settlement risk and improved operational efficiency could lead to lower transaction costs for market participants.
• Increased transparency: More efficient settlement, less errors.

Why should investors care about this change?

For most individual investors, the impact of T+2 to T+1 might be subtle. However, it’s important to be aware of potential changes:

• Availability of Funds: Settled funds from a sale might be available in your account sooner, allowing for quicker reinvestment.
• Margin Requirements: Margin calls might be triggered faster due to the shorter settlement cycle. The transition to T+1 isn’t without its challenges. Brokerages, custodians, and other market participants need to adapt their internal processes to accommodate the tighter timeframe. This includes automation, faster communication channels, and potentially increased staffing during peak settlement periods.

While the immediate impact for investors might be relatively minor, it signifies a move towards a faster, streamlined, and potentially less risky and more efficient trading environment. While challenges exist during the transition, the benefits are expected to outweigh them in the long run. Looking ahead, further advancements in technology could pave the way for even faster settlement cycles, potentially reaching T+0 (same-day settlement) in the future. However, extensive infrastructure upgrades and global coordination would likely be required before such a significant change could be implemented.

Although we are not “day traders” at Alaska Wealth Advisors, we like to keep our clients informed of current trends in the investment industry. If you have additional questions, please reach out, we are happy to sit down with you to review your financial plan.

Dave Valdez, CWS®, CLU®, ChFC®
Chief Operating Officer

The opinions expressed are those of Alaska Wealth Advisors Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed.

Alaska Wealth Advisors, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Alaska Wealth Advisors’ investment advisory services can be found in its Form ADV Part 2 and/or Form CRS, both of which are available upon request. Material presented has been derived from sources considered to be reliable, but accuracy and completeness cannot be guaranteed.