What Is a Regular-Way Trade (RW)?
A regular-way trade (RW) is settled within the standard settlement cycle, which, depending on the transaction type, will typically range from one to three business days.
T+1, T+2, and T+3 are the abbreviations that refer to the settlement date of security transactions. The "T" stands for transaction date, which is the day the transaction takes place. The numbers 1, 2, or 3 denote how many days after the transaction date the settlement—or the transfer of money and security ownership—takes place.
- A regular-way trade (RW) is settled within the standard settlement cycle, which, depending on the transaction type, which typically range from one to three days.
- The settlement cycle is a defined period, preset by regulators of that market, for the buyer to complete payment or for the seller to deliver the assets traded.
- The Securities and Exchange Commission (SEC), in 2017, approved a new, and shorter, settlement rule for equities calling for T+2.
- The SEC is currently considering T+1 (next-day) and even T+O (same-dat) settlement for stocks in the future.
Understanding a Regular-Way Trade (RW)
A regular-way trade (RW) has the typical and defined settlement cycle required for that particular asset. In contrast, a non-regular settlement would have a shorter or longer settlement cycle, allowing for a quicker, or delayed, transfer of funds and the asset between the seller and the buyer.
The settlement cycle is a defined period, preset by regulators of that market, for the buyer to complete payment or for the seller to deliver the assets traded. The settlement cycle differs for different assets. Most trades are regular-way trades.
The reason for the settlement period time lag from a trader to a settlement is to allow both parties to gather the needed resources to complete the transaction. When working with different currencies, it could take time for funds deposited in the buyer's account to become available for disbursement. Likewise for physical certificates or assets needed to move from the seller to the middle or clearing agent.
Speeding Up Settlement
Changes in technology and digital recording could allow for faster, if not instant, settlement of both funds and assets. It would also reduce credit, market, and liquidity risk. However, it takes time to change such procedures, even if the desire to do so is there.
As a first step, in 2017, the Securities and Exchange Commission (SEC) approved a new, and shorter, settlement rule called "T+2." Securities transactions in the U.S. now "trade plus two" days, instead of three days. This change was in direct acknowledgment of the improvements in technology and a trading environment that makes shorter settlements both feasible and valuable to all market participants.
More recently, the SEC has started to push for T+1 settlement for stocks that could be implemented as early as 2024, while also opening the door to potential T+0 (same-day) settlement in the future.
Settlement by Asset Class
Equities trading got the most significant boost from T+2 as settlements were typically three days. However, other asset classes already settle in two days, and some resolve in one day, also known as "next day". Weekends and holidays can cause the time between transaction and settlement dates to increase substantially, especially during holiday seasons like Christmas, Easter, and others.
Here are the settlement cycles for some popular assets that, if adhered to, would fall under a regular-way trade (RW):
- Equities settle T+2.
- Government bills, bonds, and listed options settle T+1.
- Spot foreign exchange transactions usually settle two business days after the execution date. A primary exception is the U.S. dollar vs. the Canadian dollar, which resolves the next business day. The foreign exchange market requires that the settlement date be a valid business day in both countries.
- Forward foreign exchange transactions settle on any business day that is beyond the spot value date. There is no absolute limit in the market to restrict how far in the future a forward exchange transaction can settle, but credit lines are often limited to one year.
Why Do Trades Take Time to Settle?
Settlement of trades involves making sure that the securities are transferred from the prior owner to the new owner and that the corresponding funds for the trade also change hands. In the old days, this was a laborious manual process that had to be done by hand or rudimentary computing devices. Moreover, a buyer of stocks may have to send a paper check to their broker to pay for the trade. Today, with electronic trading and online brokerages, settlement takes place much quicker and with far fewer errors.
If You Make a Stock Trade Monday, When Does the Money Actually Change Hands?
If you buy (or sell) a stock (with a T+2 settlement) on Monday, and we assume there are no holidays during the week, the settlement date will be Wednesday, not Tuesday. The 'T' or transaction date is counted as a separate day.
When Did Stocks Change from T+3 to T+2 Settlement?
The T+2 settlement convention began on September 5, 2017.