The three-day settlement rule in trading stocks represents the time frame in which a trade, either a buy or sell order, must be settled. Also known as T+3, which stands for transaction date plus three days, the rule is designed to provide a certain degree of stability to the stock market.

Identification

The burden is on investors to settle a stock trade within three days. This means that the brokerage firm that is facilitating the buy or sell order must receive payment within three days of the trade. An investor selling a stock must deliver the securities certificate to a broker within three days, also.

Significance

Trades that are not settled within three days pose a risk to the financial markets. This is because in the event of market downturn in the midst of heavy trading volume, there is a higher probability that investors and securities firm experiencing losses will default on an agreement.

History

U.S. regulators once required that trades be settled in five days. In 1995, the time requirement was changed to three days. This decreased pressure in the financial markets because a lesser sum of money had to be collected at once, according to the Securities and Exchange Commission.

Features

In addition to stocks, the T3 settlement rule applies to corporate and municipal bonds as well as mutual funds traded by a brokerage firm. The T3 settlement period begins on the business day following a buy or sell transaction in the stock market.

Global Perspective

Stocks traded in the United Kingdom can be completed on an extended settlement date. For instance, some companies that trade shares on the London Stock Exchange grant investors an extension so that the settlement date is drawn out for one week, according to EconomyWatch.com.

Source:

Securities and Exchange Commission: About Settling Trades in Three Days

EconomyWatch.com: Settlement Period, Settlement Risk

More Information:

All Business: What T+3 Settlment Means For Municipal Bond Market