6.2 Settlement Cycles and Repurchase Agreements
Key Takeaways
Regular-way covered U.S. securities generally settle T+1.
Repos have an opening and agreed closing leg.
Repo and reverse repo describe opposite perspectives on the same arrangement.
Settlement Cycles in the United States
The settlement cycle represents the legally mandated timeframe within which the buyer must deliver payment and the seller must deliver the securities. On May 28, 2024, the U.S. capital markets achieved a historic milestone by transitioning standard regular-way settlement from T+2 to T+1.
Regular-Way Settlement (T+1)
Under amendments to SEC Rule 15c6-1(a), the standard settlement timeframe for secondary market transactions was compressed to one business day following the trade date (T+1). Regular-way T+1 settlement applies to:
- U.S. equities (common stock, preferred stock, warrants, and rights);
- Corporate bonds, medium-term notes, and debentures;
- Municipal bonds;
- Exchange-Traded Funds (ETFs);
- American Depositary Receipts (ADRs); and
- Other securities according to their governing rules and market conventions; government securities are excluded from Rule 15c6-1(a) and require separate review.
Note
Other Settlement Conventions: U.S. Treasury bills, notes, and bonds have settled regular-way on T+1 through the Fixed Income Clearing Corporation (FICC). Standard listed equity and index options settle regular-way on T+1 through the Options Clearing Corporation (OCC). The exercise of an equity option results in the delivery of the underlying stock on T+1 post-exercise. Commercial paper commonly uses same-day settlement; confirm the agreed contract.
Cash Settlement (Same-Day / T+0)
Cash settlement is a specialized contract structure where trade execution and settlement occur on the exact same business day (T+0):
- Execution and Funding: Delivery of securities and full payment of funds must take place on the trade date itself.
- Cutoff Time: Payment and delivery are typically required by 2:30 PM Eastern Time under the applicable cash-contract rule; an eligible late execution has its specified prompt-delivery provisions. Apply the actual instrument and clearing cutoffs.
- Operational Use Cases: Investors utilize cash settlement when an immediate need for capital arises, when an institutional participant must execute an intraday cash sweep, or when an investor must acquire shares on a corporation's dividend record date to ensure legal entitlement to an upcoming dividend distribution.
Seller's Option Settlement
Seller's option is a negotiated settlement contract utilized when the selling party anticipates that delivering the securities will require additional time beyond the standard regular-way timeframe (for example, physical certificates held in a deceased estate's safe-deposit box awaiting probate release or legal opinion of counsel):
- Delivery Window: The agreed delivery date cannot be earlier than T+2 (the business day following regular-way settlement) under the contract and applicable Uniform Practice Code provisions; do not assume an unrestricted universal 60-calendar-day maximum.
- Early Delivery Notice: If the seller resolves the delivery obstacle and becomes capable of delivering the securities prior to the agreed terminal date, the seller must deliver one business day's prior written notice to the buying broker indicating intent to deliver.
| Settlement Cycle | Legal Authority / Rule | Settlement Date | Required Delivery & Payment Window | Common Applicable Instruments |
|---|---|---|---|---|
| Regular-Way (T+1) | SEC Rule 15c6-1(a) | Trade Date + 1 Business Day | Next business day by clearing house cutoff | U.S. equities, corporate bonds, municipal debt, ETFs, U.S. Treasuries, listed options |
| Cash Settlement | FINRA Uniform Practice Code | Same Day (Trade Date / T+0) | Typically by 2:30 PM ET on trade date | Urgent liquidity trades, dividend record-date capture transactions |
| Seller's Option | FINRA Uniform Practice Code | Negotiated (later negotiated date) | Agreed settlement date; 1 business day notice for early delivery | Estate liquidation, restricted stock legend removal, physical certificate retrieval |
Repurchase and Reverse-repurchase Agreements
A repurchase agreement (repo) combines a sale of securities with an agreement to repurchase them at an agreed price and date. Economically it commonly functions as collateralized financing. The seller receives cash; the buyer supplies cash and receives securities. The same trade is a reverse repo from the cash provider’s perspective. Identify the speaker before labeling the transaction.
An overnight repo unwinds the next business day; a term repo runs to the agreed maturity. Operations verifies opening and closing legs, securities, collateral eligibility, haircut, price, rate, cash amounts, settlement instructions and margin maintenance. Repos do not simply follow ordinary equity T+1 because they involve securities; their agreed legs and applicable clearing rules govern.
In an illustrative overnight transaction, a dealer receives $1,000,000 and agrees to repay that amount plus one day’s interest. At 3.6% using a 360-day convention, interest is $100: 1,000,000 × 0.036 ÷ 360. The close cash amount is $1,000,100. The convention is an input to this example, not an assumption for every contract. If the collateral loses value, the agreement may call for more collateral or cash before maturity.
A tri-party repo uses an agent for collateral allocation and settlement services. Agent involvement does not erase the principals’ credit or liquidity exposure. Review substitutions, valuation sources and failed legs. A missed opening leg differs from a failure to return collateral at unwind.
Treasury-market central-clearing changes have staged compliance dates and transaction-specific scope. Do not treat a future implementation deadline as a claim that every Treasury repo is already centrally cleared. Series 99 candidates need to recognize who supplies cash, who supplies collateral, which leg is due and where to escalate a mismatch.
Sources checked 2026-10-20: SEC T+1 FAQ, FINRA buy-ins, FINRA reclamation.
A dealer obtains $1 million overnight at 3.6% using a 360-day year. What is the assumed one-day interest?
$100
$1,000
$3,600
$36,000
Sections you finish are checked off in the contents.