7.2 Cash Accounts, T+1 Settlement, Regulation T, Extensions, and Freeriding
Key Takeaways
Most covered regular-way securities transactions settle on T+1 under Rule 15c6-1 unless the parties expressly agree otherwise at the time of the transaction or an exception applies.
In a Regulation T cash account, full payment is generally due within two business days after the payment period tied to settlement; under T+1 this is commonly described as T+3.
A customer may not rely on selling the purchased security to pay for it without having made payment; that pattern is freeriding.
Failure to pay can require prompt cancellation or liquidation and a 90-day cash-account restriction, unless a valid extension or exception applies.
Cash-Account Principle
A cash account is based on full payment rather than broker-dealer credit. The firm may purchase a security for a customer in reliance on the customer's agreement to make prompt payment, but it may not use the account as an undisclosed margin account or repeatedly finance purchases through sales of the same securities.
Freeriding occurs when a customer purchases securities and then sells them to cover the purchase without having deposited the required funds. A bona fide sale of other fully paid securities can be used when the rules permit; the issue is whether the customer actually paid for the purchase as required, not whether the account later showed sale proceeds.
Settlement Versus Payment
SEC Rule 15c6-1 establishes T+1 as the regular-way settlement cycle for most covered broker-dealer transactions entered on or after May 28, 2024. The trade date is T and the next business day is settlement. Parties can expressly agree to a different settlement date at the time of the transaction, and the rule contains exclusions, so a principal should use the security and transaction facts rather than apply T+1 mechanically to every product.
Federal Reserve Regulation T separately governs the period for obtaining customer payment. In a cash account, payment is generally required within two business days after the security's payment period tied to regular-way settlement. For a security settling T+1, this is commonly tested as T+3. Settlement remains T+1; T+3 is not a new settlement cycle.
| Event | Typical covered-security timeline |
|---|---|
| Trade | T |
| Regular-way settlement | T+1 business day |
| Cash-account payment deadline | Settlement plus two business days, commonly T+3 |
| Failure response | Prompt cancellation or liquidation, subject to rule exceptions or an extension |
| Freeriding restriction | 90 calendar days of cash in advance |
Failure to Pay and the 90-Day Restriction
If full payment is not received within the permitted period, Regulation T generally requires the broker-dealer to cancel or otherwise liquidate the transaction promptly. Liquidation does not erase a resulting debit or customer loss. If a security is sold before it has been paid for, the account may be restricted for 90 calendar days so sufficient funds must be in the account before future purchases.
The restriction is not a suspension of the customer's right to sell securities already owned. It changes the conditions for new purchases. Opening another account or changing registrations to evade a restriction should be detected through customer and household controls.
Extensions and Exceptions
When payment is delayed by circumstances beyond the customer's control, the firm may seek an extension through the designated examining authority under applicable procedures. An extension is not automatic and should not be used to accommodate chronic late payment. The principal should document the reason, amount, security, deadline, request, decision and subsequent receipt or liquidation.
Certain de minimis amounts and specific transaction types may receive rule treatment different from an ordinary purchase, but a firm policy may be stricter. Mutual-fund direct business also demands reconciliation among the broker-dealer, transfer agent, clearing firm and bank because a rejected or reversed payment can surface after an application was transmitted.
Fund Payments and Insurance-Product Settlement
Mutual fund and variable contract business often settles outside the regular-way securities cycle:
- Rule 2341(m) requires a member that engages in direct retail transactions in investment company shares to transmit customer payments to the payee (the underwriter, the fund or its agent) by the end of one business day after the later of receiving the customer's order or the customer's payment. An underwriter that receives payments from other members in wholesale transactions must forward them to the fund or its agent within two business days.
- A June 1995 SEC exemptive order, still in effect under T+1, exempts contracts for securities issued by an insurance company separate account, including variable annuity and variable life contracts, from Rule 15c6-1, because applications, underwriting and premium processing do not fit a fixed regular-way cycle. Rules 2320 and 2330 instead govern prompt transmittal and principal review of those applications.
A principal should not let a representative hold a fund check until the customer "decides," or batch applications for weekly submission; either practice breaks the prompt-payment chain and can put the firm's customer-protection exemption at risk (Section 12.2).
Supervisory Controls
Daily aging should identify unpaid purchases before the deadline, not after. Exception reports should link same-security sales, returned checks, ACH reversals, extensions and related accounts. Representatives must not enter false settlement instructions, mark an order unsolicited to avoid review, or promise that a liquidation will have no consequence. Repeated late payment can indicate unsuitable trading, financial distress, unauthorized transactions or AML concerns.
Worked Timeline and Exceptions
Assume a covered security is purchased on Monday with no holiday. Regular-way settlement is Tuesday, and the ordinary cash-account payment period runs through Thursday. If a market holiday falls in the sequence, count business days rather than calendar days. An expressly agreed alternate settlement date can also change the analysis, so the trade record matters.
A late payment caused by an avoidable customer pattern is different from a delay outside the customer's control. Extension requests should be exceptional, supported and timely. Supervisors should compare representatives because repeated requests from one book may indicate that orders are entered before customers commit funds.
The principal should also distinguish a Regulation T restriction from a firm's credit or risk restriction. A firm may impose stricter cash-in-advance conditions based on payment history, but it should describe them accurately and apply them consistently.
For a covered security settling regular way on T+1, how is the ordinary Regulation T cash-account payment deadline commonly expressed?
Settlement plus two business days, commonly T+3.
T+5 regardless of the security or settlement agreement.
On trade date before the order may be entered in every case.
T+1 because payment and settlement are always the same deadline.
A customer buys fund shares without depositing money and sells those same shares to pay for the purchase. What is the principal concern?
The sale converts the account into a margin account with no further action.
There is no issue because the sale proceeds eventually covered the purchase.
The customer has freeridden, which can trigger liquidation consequences and a 90-day cash-in-advance restriction.
The customer has created an acceptable extension automatically.
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