Preparing for next phase of ETF trading as “T+1” starts on May 28

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Preparing for next phase of ETF trading as “T+1” starts on May 28

Expert Perspective


May 24, 2024

The U.S. financial industry’s plan to shorten the standard settlement cycle of U.S. securities trades to one day (T+1) from two days (T+2) takes effect on May 28, 2024. It marks the continuation of a years-long process to help limit risks of securities trading, enhance liquidity, and improve ETF market efficiency.

The T+1 settlement change is good news for investors in that it will make ETF trading and the settlement of trades smoother, as ETF adoption continues to expand. We believe this change is likely to make capital markets more efficient because all U.S.-listed securities, including underlying stocks and bonds held by ETFs, will have T+1 settlements. This change will also help keep domestic trading costs low and ETF shares liquid.

More narrowly, a shorter settlement window can improve advisor operations and smoothen model portfolio trading as model managers and advisors, in general, will have to wait less time for trades to settle before making their next move.

Some challenges remain, such as trading U.S.-listed international ETFs, but following best trading practices can go a long way toward controlling remaining risks. There will also be cases where expedited settlement—or T+0—will sometimes be necessary for issuers to coordinate with players in the primary market.

If you have any questions, call our ETF Capital Markets Desk to help you more decisively address possible issues.

Faster and faster

It’s worth comparing the T+1 shift with e-commerce to understand the significance of the changes.

Despite the efficiencies that buying online represent, you often must wait two days to receive packages. Similarly, when an investor buys a stock, bond, or shares of an ETF, they don’t take possession of it instantly. The upcoming changes represent the latest move to speed things up, a bit like overnight delivery.

Shortening settlement periods reduces counterparty risk and makes trading quicker, cutting collateral requirements and adding overall efficiency to capital markets. Longer settlement periods present counterparty risk—the risk that one side of the transaction fails to settle correctly, which is a worthy concern in a world where so much is becoming faster and faster.


History of changes to trade settlement changes in U.S. securities markets

Illustration shows how U.S. regulations around securities trade settlements have evolved over the past several decades. Since the mid-1990s, trade settlement periods have been shortening. In the realm of ETFs, trades were settling in three days in 1995. By 2017, settlements occurred in two days. By May 28, 2024, ETF trades are scheduled to settle in one day.

Source: Vanguard

Benefits of T+1 settlement

Reduce counterparty risk

Shortening trade settlement time reduces the exposure to a potential default by the other party involved in the trade.

A shorter settlement cycle also means there’s less time for market volatility or adverse events to impact completion of the trade. Think of the short squeeze in January 2021 with “meme stock” shares. Shorter settlement times would likely have reduced the collateral requirements during that episode, potentially clearing some of the chaos that flared up.  

Improve capital market efficiency

Shorter settlement times also mean that capital is tied up for less time, making it more attractive for investors looking for quick access to their funds or to transfer between investment vehicles without missing out on market exposure.

Cutting settlement time means cutting collateral requirements for market makers and authorized participants (APs) whose hedging strategies and balance sheet usage can leave them financially exposed until trades settle. Depository Trust & Clearing Corp. (DTCC) estimates the volatility component of margin requirements will fall 41% due to the shift to T+1, potentially saving billions of dollars.

Challenges of T+2 for international securities

Certain underlying international securities held within U.S.-listed ETFs that will conform with the new T+1 settlement rules will still have T+2 settlement after May 281. This may present ongoing challenges for investors keen on integrating foreign stocks and bonds into their portfolios.

The good news is that around 95% of all international ETF trading volume occurs in the secondary market, which means in such trading there’s no need for APs to create or redeem shares. Therefore, most investors should not incur additional costs.


2023 primary and secondary market volumes in international ETF markets

Chart shows the breakdown of primary and secondary market trading of international ETFs for each of 2023’s 12 months. In 11 of the 12 months, secondary market activity was between 91% and 97%, dipping below 90% only in December, when it was at 87%. The chart suggests that ample secondary market liquidity lessens the risks of settlement issues in international ETFs, which generally can be more difficult to trade than ETFs that hold only U.S.-listed securities.

Source: Bloomberg, from January 1, 2023 through December 31, 2023.

Vigilance in the international arena will be advisable, particularly for more thinly traded ETFs where AP's may rely more heavily on the primary market to create and redeem ETF shares.

Given that U.S.-listed international ETF shares will be settling earlier than some of the underlying international securities, the AP will need to post collateral, typically cash, until those securities settle.

This added cost could be passed down through slightly higher premium/discount volatility or wider spreads—but, again, only with trades that require access to the ETF's primary market liquidity or for more thinly traded ETFs that rely more heavily on creations and redemptions.

Our Capital Markets Desk is here to help

The Vanguard ETF Capital Markets Desk is available to help you with any questions you may have and clarify how this change may affect your clients whose ETF use is significant and growing.

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Legal notices

For more information about Vanguard funds or Vanguard ETFs, visit or call 800-997-2798 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

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