Articles and Updates
July 2024
The Impact of T+1 on Options
On Tuesday May 28, 2024, the highly anticipated settlement cycle conversion from T+2 to T+1 was rolled out. The products affected by this change include ‘transactions for stocks, bonds, municipal securities, exchange-traded funds, certain mutual funds, and limited partnerships that trade on an exchange’ according to SEC’s Investor Bulletin announcement, click here.
What is the settlement cycle? Simply put, it is the number of business days for a product transaction to be delivered to the buyer’s account and a payment to the seller’s account. The widely used term T+2 and the new T+1 is shorthand for ‘trade day (T) plus (+) business days (1 or 2) which indicates the amount of time needed for trades to be cleared and added to the individual accounts. The settlement cycle for stocks, ETFs and the other products is overseen by the National Securities Clearing Corporation (NSCC) a subsidiary of the Depository Trust & Clearing Corporation (DTCC).
In 2017, the SEC amended the post-trade settlement cycle from three business days (T+3) to two business days (T+2). The decision to reduce the process further to T+1 is rooted in advances in technology and efforts to reduce credit, market, and liquidity risks for investors.
What is the settlement cycle? Simply put, it is the number of business days for a product transaction to be delivered to the buyer’s account and a payment to the seller’s account. The widely used term T+2 and the new T+1 is shorthand for ‘trade day (T) plus (+) business days (1 or 2) which indicates the amount of time needed for trades to be cleared and added to the individual accounts. The settlement cycle for stocks, ETFs and the other products is overseen by the National Securities Clearing Corporation (NSCC) a subsidiary of the Depository Trust & Clearing Corporation (DTCC).
In 2017, the SEC amended the post-trade settlement cycle from three business days (T+3) to two business days (T+2). The decision to reduce the process further to T+1 is rooted in advances in technology and efforts to reduce credit, market, and liquidity risks for investors.
Option Trade Settlement
The settlement of an equity option trade is distinct from the settlement of equities. Unlike an equities transaction in which an exchange-traded stock or unit is transferred from one party to another, an option trade either establishes a new option position or closes out an existing option position. The creation or close out of an option position occurs near real time once OCC receives and processes a trade from an exchange. Payment of the premium for an options trade is finalized the next trading day.Option Exercise and Assignment Settlement
When a buyer/holder of an equity options contract exercises their right to either buy (in the case of a call) or sell (in the case of a put) the shares underlying an option contract, the option exercise and assignment is processed by OCC and the settlement of shares is facilitated by NSCC whereby NSCC transfers the shares of the option deliverable from the delivering party to the receiving party and facilitates payment of the aggregate strike amount for the transfer of shares between the two parties. With the new T+1 settlement, the transfer process of the underlying shares of the option deliverable is settled on the next business day. In other words, the day after an exercise and the subsequent assignment, the deliverable settles in the investor’s account.