Trade Settlement Dates: T+1, T+2, and T+3

When you buy or sell a stock, bond or any other financial instrument, there are two important dates, namely, transaction date and the settlement date.

Transaction date, also known as the trade date, is the date on which the security is traded. On the other hand, settlement date is the date on which the trade is settled, that is, the date on which the buyer of the security must pay for the securities delivered to him by the seller.

Settlement date is usually one to five days after the trade date, depending on the transaction type. These are referred to as T+1, T+2, T+3, etc. The terminology T+3 means that the settlement date is three business days after the trade is executed. This is also known as rollover settlement.

Stocks and bonds usually have T+3 settlement. For government securities and options, the settlement date is usually the next business day, that is, T+1.

All markets aim to reduce the settlement to T+1 or even same-day settlement. A short settlement period helps in reducing the risk of default by the counterparty. It also helps in minimizing the effects of any dealing mistakes, because any errors can be spotted quickly before the stock prices have changed drastically.