Shift to T+1 settlement cycle
In the US, Canada and Mexico the settlement cycles on stock trades and other securities go from two days to one as of May 2024. Here we will explain to you which effects this will have on your portfolio that you hold via LYNX.
Definition: Settlement
Making a trade may feel like an instant process. But there are actually two important dates involved in any trade that you should know and understand — and one of them is about to make an important change.
Transaction date:
The transaction date is the day you successfully execute a trade.
Settlement date:
The settlement date is when that trade becomes official.
The settlement date is the date when payment is due for purchases, when securities sold must be delivered, and the security’s transfer agent has verified the new shareholder and removed the former one.
When you buy or sell securities, settlement refers to the official transfer of securities to the buyer’s account and the cash to seller’s account.
What is going to change?
In May 2024, settlement cycles on US, Canadian and Mexican stock trades and other securities move from two days to one:
- Starting on 28 May 2024, settlement cycles for U.S. securities trades will transition from two business days to one, known as T+1 (trading day plus one business day).
- Starting on 27 May 2024, settlement cycles for Canadian and Mexican securities trades will similarly transition from two business days to one.
What’s driving shorter settlement cycles?
Advancements in technology have enabled quicker trade settlements. For instance, since most trading and banking activities are conducted online, there’s no longer a need for extra days to physically deliver securities or funds. A key advantage of a shorter settlement cycle is the reduced risk in the securities market. The shorter the interval between trade execution and settlement, the lower the likelihood of events impacting the transfer of cash or securities. This is particularly important during periods of high market volume and volatility, such as the surge experienced after the COVID-19 pandemic outbreak in March 2020. Additionally, this change benefits investors by allowing faster access to their funds post-transaction.
Which securities will be affected?
US products
US products in scope include U.S. cash equity securities, ETFs, corporate bonds, etc.
Please see the Full List of In-Scope Products from Depository Trust & Clearing Corporation (DTCC) for more details.
Canadian products
Canadian products in scope are securities trading on secondary markets.
Please see the Canadian Capital Markets Association (CCMA) Asset List.
Mexican products
The Mexican equities market and the securities listed in the International Quotation System (SIC).
How will the change from T+2 to T+1 affect my account?
There will be some limited impacts depending on the nature of your accounts. Via LYNX you can hold either a cash account or a margin account. If you are unsure what type of account you hold via LYNX, please find further instructions here: Which account type do I have?
Cash account:
Currently:
Prior to executing a purchase, you must ensure your account has sufficient cash in the trading currency of the security to cover the purchase cost on the settle date of the trade, currently T+2. This includes executing forex trades, as may be necessary, to convert cash into the appropriate currency. Since the standard settlement timeframe for forex trades is T+2, Cash accounts will need to do the Forex conversion at least at the same day they do the stock trade, to ensure settlement on the same date.
T+1 Change:
After the switch to T+1, cash accounts will work the same way. Just make sure you have enough cash in the trading currency before making a purchase. This might include doing forex trades at least one day in advance, since they settle in T+2, to ensure settlement on the same date.
The following animation illustrates the new settlement process for the affected US, Canadian and Mexican products (after the change from T+2 to T+1). You can see that the settlement period of the FX trade now differs from the purchase of the securities:
The financial instruments shown in the animation do not constitute as a trading recommendation.
Please note:
Section 5 C of the IBIE client agreement for EEA clients and section A2.3 of the IBUK client agreement for non-EEA clients does not apply for LYNX clients. This means that in cash accounts held via LYNX, IBIE/IBUK won’t automatically convert funds to cover currency obligations from purchases. So, ensure you have the needed currency beforehand.
Margin account:
The current account behavior for clients with a margin account will continue after the change to T+1.
To open a position in a security that is denominated or settled in a currency you do not hold, clients with a margin account can either:
- (a) convert enough cash to cover the cost of the position in the denominated/settled currency, or
- (b) open the position without converting currency and IBKR will extend a margin loan to cover the cost of the trade (please note that for option (b) when the position is closed the margin loan will close as well but the gain/loss on the position will remain in the denominated/settled currency).
For some investors, one-day settlement cycles may mean greater convenience. For others, T+1 may require closer attention to how shorter settlement times could affect one’s investment, trading, or tax decisions. To learn more about how this transition could affect your individual situation, consider reaching out to a qualified advisor.
FAQ: Shift to T+1 settlement
To help you become more familiar with the change of the settlement periods, we will answer the most important questions on this subject in the following:
In May 2024, settlement cycles on US, Canadian and Mexican stock trades and other securities move from two days to one to improve market efficiency.
T+1 means that trade-related settlement must be done within one day of a transaction’s completion (T = trade date).
The SEC has finalized a rule to shorten the settlement cycle for US broker-dealer transactions from T+2 to T+1, effective May 28, 2024.
Similarly, the Canadian Capital Markets Association (CCMA) and Mexico’s Equities CCP, Contraparte Central de Valores (CCV), along with the Mexican Association of Brokerage Firms (AMIB), have also adopted rules to switch from T+2 to T+1. This change will be effective one day earlier than the US, starting on May 27, 2024, which falls on a Monday (a US holiday).
US Products in scope include U.S. cash equity securities, ETFs, corporate bonds, etc.
Please see the Full List of In-Scope Products from Depository Trust & Clearing Corporation (DTCC) for more details.
Canadian products in scope are securities trading on secondary markets.
Please see the Canadian Capital Markets Association (CCMA) Asset List.
The Mexican equities market and the securities listed in the International Quotation System (SIC).
US products
These are the instrument classes that qualify for T+1 settlement in accordance the DTCC’s product scope list:
- Equities,
- Corporate bonds,
- Municipal bonds,
- Warrants,
- Rights,
- Money market instruments,
- Unit investment trusts,
- Financial instruments comprised of these security types, for example, American Depository Receipts (ADRs), exchange traded funds (ETFs) and mutual funds.
Note: ETFs issued under a Common Depository structure and FED instruments will not be subject to T+1.
Canadian products
Securities in scope include but are not limited to:
Fixed income:
- Corporate bonds;
- Exchange traded debentures;
- Government bonds (excluding savings bonds);
- Convertibles;
- Preferred shares.
Equities:
- Common shares;
- Rights;
- Warrants;
- Subscription receipts;
- Canadian Depository Receipts;
- Real Estate Investment Trusts.
Mexican products
The scope of the move to T+1 settlement comprises Mexican equities and those listed in the international quotation system (SIC), which both consider the United States of America and Canada as their principal markets.
You can check for this in the Settings under Account Type in the Client Portal.
This is not possible, since the rule is implemented by the SEC, CCMA, DTCC, CCV and AMIB.
At the moment, for cash accounts held via LYNX, IB won’t automatically convert funds to cover currency obligations from purchases. Please, ensure you have the needed currency beforehand. Section 5 C of the IBIE client agreement and section A2.3 of the IBUK client agreement do not apply for LYNX clients.
Here you can read up on how to exchange currencies for your account: FX Conversion
Yes, all clients trading in-scope U.S., Canadian or Mexican products are expected to match and affirm transactions on a timely basis and settle on T+1.
USA:
First trade date for T+1 will be Tuesday, 28 May 2024. All trades concluded on this business day will have the settlement date Wednesday, 29 May 2024.
Note: Wednesday, 29 May 2024, will be a double settlement date for instructions with trade date Friday, 24 May 2024, or Tuesday, 28 May 2024.
Canada:
The Canadian Capital Market Association (CCMA) announced Monday, 27 May 2024 as the Canadian T+1 start date. The Canadian market will be open for business on Monday, 27 May 2024.
Note: Tuesday, 28 May 2024, will be a double settlement date for instructions with trade date Friday, 24 May 2024, or Monday, 27 May 2024.
Mexico:
The Mexican market is open for business on Monday, 27 May 2024 (first trade date for T+1 settlement).
Note: Tuesday, 28 May 2024, will be a double settlement date for instructions with trade date Friday, 24 May 2024, or Monday, 27 May 2024.