T, T+1, T+2 trading modes

Question

Why are there different settlements modes T, T+1, T+2? why can't everything be settlement "today" T0? I understand what the difference is, but I don't understand why people did this and in what situations one mode can be useful, unlike others?

Answer 1

The differences in settlement cycles between the various asset classes exist mainly due to historical reasons.

The trading, clearing, and settlement of stocks, bonds, futures, options, and other derivatives has evolved fairly independently over several decades.

You may remember that settlement for stocks was shortened from T+3 to T+2 in 2017. So why can't it be done on T+0? Mainly because of the necessary checks and balances to make sure it's done correctly, which can't be done faster currently.

Q: If the industry managed a move to shortened settlement from T+5 to T+3, and then T+3 to T+2, why can’t the industry likewise make a move to T+1 or T+0?

MM: Today, DTC and NSCC can process trades with shortened settlements based on client request. Although DTCC’s current infrastructure supports T+1 and limited T+0 settlement cycles, market behavior, legacy infrastructure and operational processes at client firms make it difficult to accelerate further without a lengthy coordinated industry effort. Forcing a wholesale move by the industry would not be easy, that’s why we’re exploring this digital accelerated settlement service as an optional service. It could introduce optimized settlement processes and accelerate settlement to T+0, while retaining the core benefits of DTC’s centralized netting and risk management. One important key thing to note is that this service would not force operational or technical change, nor would it cause fragmentation the clearance and settlement ecosystem.

https://www.tradersmagazine.com/departments/clearing/moving-settlement-processes-to-t0/

Answer 2

I believe you're thinking about the "settle" date.

When you actually "get the money".

Say we absolutely agree contractually that you will sell me a house for $x, and we do that today at 11:13AM.

The deal is done and legally binding.

However it will only be "settled" - so, you will literally have the money in your account, and I will be in the house - in perhaps three days.

Similarly, any trade whatsoever you do on the markets, will take some time to "settle" (usually about 2 days).

(There is no relationship at all to futures or options. Note that if you happen to make a trade involving futures or options (or bonds or anything else), that trade also will take a day or two to settle.)

It's fully explained in many articles, here's a clear one: https://www.investopedia.com/ask/answers/what-do-t1-t2-and-t3-mean/