What is T+1 (T+2,T+3)
T+1 (T+2, T+3) abbreviations 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.
BREAKING DOWN T+1 (T+2,T+3)
For determining the T+1 (T+2, T+3) settlement date, the only days counted are those on which the stock market is open. T+1 means that if a transaction occurs on a Monday, settlement must occur by Tuesday. Likewise, T+3 means that a transaction occurring on a Monday must be settled by Thursday, assuming no holidays occur between these days. But if you sell a security with a T+3 settlement date on a Friday, ownership and money transfer does not have to take place until the following Wednesday.
The period between transaction and settlement is not flex time in which an investor can back out of a deal. The deal is done on the transaction day – it's only the transfer that does not take place until later.
Why Settlement Happens T+1 or More Days After a Transaction
In the past, security transactions were done manually rather than electronically. Investors would have to wait for the delivery of a particular security, which was an actual certificate, and they would not pay until receipt. Since delivery times could vary and prices could fluctuate, market regulators set a period of time in which securities and cash must be delivered.
Some years ago, the settlement date for stocks was T+5, or five business days after the transaction date. Until recently, settlement was set at T+3. Today, it's T+2 (i.e., two business days after the transaction date).
How T+1 (T+2, T+3) Settlement Works
Settlement dates vary, according to the type of security. Treasury bills, for instance, are about the only security that can be transacted and settled on the same day. All stocks and most mutual funds are currently T+2; however, bonds and some money market funds will vary between T+1, T+2 and T+3.
As an example of how T+1 (T+2, T+3) settlement dates work, consider an investor who buys shares of Microsoft (MSFT) on Monday, April 9, 2018. While the broker would debit the investor's account for the total cost of the investment immediately after the order is filled, the investor's status as a shareholder of Microsoft will not be settled in the company's record books until Wednesday, April 11. The settlement date is the date on which the investor become a shareholder of record. Weekends and public holidays are not included in the day count.