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Main Dictionary T

T+1 (T+2, T+3)

T+1 (T+2, T+3) — are the abbreviations used on the exchanges to describe the settlement date of the transaction. The letter “T” means a date when a transaction occurs. The number shows how many days the transaction will take. The trader should understand the system T+1 (T+2, T+3) to calculate the settlement date rightly. 

How to Decipher T+1 (T+2, T+3)   

On the exchange, each asset has a certain settlement day, and it is necessary to define when it will happen. The abbreviation T+1 (T+2, T+3) shows how many days the trader has to wait before the transaction.

T+1 (T+2, T+3) trading modes:

  • T+1. The T+1 trading mode means that the money and securities are blocked after the transaction but the actual process of exchanging securities for money (clearing) occurs only at the beginning of the next business day. Settlements occur in 1 day: a transaction is effectuated today, and the calculations are effectuated tomorrow.
  • T+2. T+2 means the same as T+1, but clearing occurs one more business day later. Settlements occur in 2 days: a transaction is effectuated today, and the calculations are effectuated the day after.
  • T+3. T+3 means that the clearing occurs two business days later. 

Also, there is another specific mode named T0 or just T. It’s quite simple to understand. The trader makes a deal today, and they exchange the goods for money today. The balance of both securities and money can be considered equal to the real state of the account. But this mode is rarely applied on the stock exchanges. 

Each asset has its mode for trading. Stocks are usually traded in T+2 mode. Bonds, money market funds, and mutual funds are traded in all T+1 (T+2, T+3) modes.

Another thing that is necessary to consider is the holidays. If you trade in the mode T+2 or T+3, and the holiday stands between, this day is considered the day off. If you sold an asset on Friday, then you will receive money for stocks (T2 mode) on Tuesday, and for bonds (T1) on Monday. That’s why it is necessary to follow the settlement day on the big holidays like New Year. The modes T+1 (T+2, T+3) are automated. They can’t be accelerated by the trader’s will. 

Violations of T+1 (T+2, T+3) modes

There is a thing called a settlement violation. It happens when the trader doesn’t cover the new trades by the settled funds. They occur both in cash and margin accounts, for example, during the trading of non-marginable securities. To avoid it the trader should understand the abbreviations T+1 (T+2, T+3). It requires attention, a well-thought-out approach and practice. Also, it is necessary to monitor the state of the personal account.    

There are several types of basic violations of T+1 (T+2, T+3) modes:

Good faith violation is a situation when the trader purchases assets from a cash account and sells them before the postponed money is fully settled. This means, the trader buys the stocks and sells the pending funds.          

The first instance of good violation isn’t severe. The trader receives only a notification. Second-fourth violation is punished by the 90-day limitation. This means the trader can use only the funds stored in the account. Fifth violation is punished by the total limitation. 

Freeriding violation is a situation when the trader purchases an asset to buy the same asset in an account with no settled cash and then sells it before depositing funds. This violation is punished by a 90 days conservation of account. Within this time the trader can use only the funds available on the account. 

Liquidation violation is the missing of the trade date. It is divided into two major types. The first one is called the cash liquidation violation. Another one is margin liquidation violation. Each violation has specific sanctions and limitations. 

  • Cash liquidation violation happens, if a trader sells an asset and utilizes the realization value to cover the purchase of previously bought assets. It resembles a freeriding violation. The main difference is that traders sell an asset other than the one it purchased. They use this asset to cover another trade.     

First liquidation violation doesn’t lead to punishment. Trader receives a notification. Second-fourth violation is punished by the 90-day cash limitation. The work of a trader is limited by the funds on the account. Fifth violation is punished by the total limitation. 

  • Margin liquidation violation is a situation when the account gets Federal and regulatory calls and the trader sells assets to cover them. It happens because there is no Fed call or regulated control call on your bank account.

Fed call is a deposit amount that should be on the account to follow requirements for work in a margin account. Traders can borrow some funds and cover the rest with the cash. Usually, 50% is enough for them. 

Maintenance call is a situation when the amount of money on the account is less than it is necessary to meet all necessary requirements. A maintenance call happens when there aren't enough funds in the personal account to follow requirements. 

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