In finance, T+2 means the trade date plus two days when securities transactions must be settled.
T+2 stands for the date of a certain trade plus two days and indicates the settlement of a security transaction. T+2 is the most popular settlement date used in the market. According to the market’s rules and conventions, it is a must for securities transactions to be settled within an agreed-upon period of settlement. If security is bought or sold with a T+2 settlement and an investor acquires it on Sunday, the settlement date will be Thursday rather than Wednesday.
There are two crucial dates that investors should comprehend when they purchase and sell stocks, bonds, mutual funds, exchange-traded funds, or other financial instruments, which are the settlement date and transaction date. In the financial markets, the transaction date is referred to as “T”. The settlement dates are referred to as “T+1”, “T+2”, or “T+3”, which take place on dates of transactions plus 1, 2, or 3 days.
The transaction date is the date on which trades take place. Today, for example, would be the transaction date if an investor purchased 50 shares today. This date will always be the date on which the transaction is completed, Therefore, the date never changes after completing a certain transaction.
The settlement date, on the other hand, is the date of the ownership’s transference. Note that depending on the security type, this does not necessarily take place on the date of the transaction.
Important: There will be variations in the settlement times for each security. As for mutual funds, they vary, but the settlement can be either T+1 or T+2.
History of T+2
Instead of being performed electronically, investors had to perform security transactions manually and wait until securities were delivered, which came in the form of physical certificates. The payment was made after receiving of the certificates. The time limit within which cash and securities are delivered has been determined by regulators due to the variable delivery times and ongoing price fluctuations.
The London Stock Exchange and the Amsterdam Stock Exchange had strong ties in the 1700s and frequently listed the stocks of each other. The cash or physical stock certificates were being moved from the Netherlands to the UK and back for the trades to be cleared. Consequently, the standard time of settlement was fourteen days and the majority of exchanges followed the same track.
The processes of settlements on national stock exchanges were different. Different states employed one of two primary periods of settlement. The first one is the fixed settlement date, which is a date when every transaction is settled. The second is the fixed settlement lag, a specified number of days following the transactions. The settlement occurred on specified dates only once each month in Italy, France, Belgium, Switzerland, and other states.
During the 70s and 80s, the periods of the settlement were shortened, and the dates of the settlement were shortened to 7 days. They were shortened to 5 days after that and finally to 3 days. The period of 2 days (T+2) received much attention in 2017, with many exchanges adopting it. Both the UK and the US implemented the T+2 settlement date in 2017.
