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The T+3 Cycle Rule in Securities Trading

Investors buying or selling securities in the U.S. has 3 days after the date of trade to complete their securities transactions.  This 3-day grace period following the trade date is known as the T+3 cycle.

The T+3 cycle (date of trade and an additional 3 days) is the period within which an investor must settle his obligations with the brokerage firm that facilitated the trade.  Thus when you buy securities, you have T+3 days to pay your broker for the stocks you have bought.  Likewise when you sell securities, you have T+3 days to give your broker the securities certificates you have sold.

4 Things You Should Know About the T+3 Cycle Rule

The T+3 rule is pretty straightforward.  Just count 3 days after trade date to know your closing date.  However, the following are some things that any securities investor must remember about the T+3 cycle rule:

1. The T+3 rule covers only business days.

Do not include Saturdays, Sundays and all days when securities exchanges are closed.  The following examples illustrate the T+3 cycle rule in action:

  • Example 1:  Let's say you are selling some stocks on a Monday.  Counting 3 business days after Monday, you will have until close of business on Thursday of the same week to deliver your stock certificates to your broker.
  • Example 2:  Let's say you bought some stocks on December 31, 2009 - a Thursday.  Counting 3 business days after the date of purchase, you would have had until close of business on January 6, 2010 - Wednesday of the following week - to pay your broker in full.

    The day following your date trade (January 1, 2010) was a Friday, but it was also an official holiday so the markets were closed.  The following days - January 2 and 3 - were a Saturday and a Sunday (respectively).  In this example, therefore, the 3-day period after trade date was January 4-6, 2010.

Note: On rare occasions, a securities market can close early.  You should be on the lookout for such events if you don't want to jeopardize your securities transactions.

2. The T+3 cycle applies to most types of securities.

The T+3 rule applies to most but not all types of securities transactions.  For instance, transactions involving stock options and government securities have a shorter settlement window.  For these types of securities, a T+1 schedule applies and investors must settle one business day after the date of the securities transaction.

Whenever you buy or sell securities, ask your broker about the applicable trading settlement schedule.  While the T+3 cycle rule almost always applies, you should still let your broker confirm this for you.

3. The T+3 cycle rule does not mean you'll receive payments or securities certificates within 3 business days of trade date.

The T+3 cycle rule only stipulates how long buyers and sellers have to settle with brokers on securities transactions.  It does not say how long brokers have to forward payments and certificates received to their clients.

In other words, if you sell your securities, you will be required to deliver the certificates to your broker within T+3 days.  However, you can't be sure you will receive payment for these securities within the same period of time.   If you want to know how soon you will receive payments or certificates, ask your broker.

4. You may incur additional costs if you don't comply with the T+3 rule.

If you don't comply with the T+3 rule, your broker may charge you additional fees.  Brokerage firms also have the right to liquidate securities that buyers haven't paid for within the settlement cycle.  If your brokerage firm sells your unpaid-for securities and incurs a loss in the process, it may pass this loss on to you as a penalty fee.

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