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Stock Settlement: Why You Need to Understand the T+3 Timeline

Stock Settlement: Why You Need to Understand the T+2 Timeline

Key Points
  • Stock settlement violations can occur when new trades are not properly covered by settled funds.

  • Although settlement violations generally occur in cash accounts, they can also occur in margin accounts, particularly when trading non-marginable securities.

  • We discuss the main types of settlement violations and how to avoid them.

Frequently asked questions

What is settlement?

When you buy or sell securities, settlement marks the official transfer of the securities to the buyer's account and the cash to the seller's account.

When does settlement occur?

For most stock trades, settlement occurs two business days after the day the order executes. Another way to remember this is through the abbreviation T+2, or trade date plus two days. For example, if you were to execute an order on Monday, it would typically settle on Wednesday. For some products, such as mutual funds, settlement occurs on a different timeline.

What counts as settled funds?

  • Incoming cash (such as a check deposit or wire)
  • The available margin borrowing value in a margin account (doesn't apply to a cash account)
  • Settled sale proceeds of fully paid-for securities

How can I view settlement information on

There are two ways. You can log in to > Accounts > History & Statements to see both the Transactions tab and Transaction Details window (as shown below).



Alternatively, once logged in to, you can also see your settled funds balance on the Accounts & Balance page by selecting “Additional Details” from the Margin Details dropdown menu (as shown below). 


What are the main types of settlement violations?

Good-faith violations occur when you buy a security with unsettled funds and then sell it before the proceeds funding its purchase have settled. 

Good-faith violation example

  • The situation:  Ms. Jones starts day zero (the trade date) with 100 settled shares of XYZ stock, and sells them for $2,000. The proceeds from the sale will settle on day two (T+2), but Ms. Jones decides to go ahead and invest the unsettled proceeds in UVW stock, which she buys for $1,000. The next day (T+1), one day before the XYZ trade settles, Ms. Jones sells her UVW stock for $1,500.
  • The violation:  Ms. Jones has created proceeds in her account, but they won't be settled, and therefore available to fully pay for the UVW purchase, until day two (T+2). Because Ms. Jones sells her UVW stock prior to the settlement of the XYZ proceeds used to buy it, the sale of UVW results in a good-faith violation.
  • The consequence: The first instance of a good-faith violation in an account generally results in a notification, but no restriction. However, the second through fourth combined non-freeride violations in a rolling 12 month period will result in a 90-day settled-cash restriction, during which time trading is restricted to the amount of settled funds available. The fifth combined violation of any kind generally results in a permanent settled-cash restriction. It's important to note that settlement violations of different kinds are combined to determine the action taken. A one-time exception (once in the life of the account) can be used by the client to remove a 90-day settled-cash restriction for a good-faith violation, liquidation, or extension. 

Freeriding violations are similar to good-faith violations, but without the element of pending sale proceeds. They occur when you buy a security in a cash account that lacks sufficient settled funds and then sell the same security before depositing funds to pay for its purchase. This violation can occur whether the purchase and sale occur on the same day or on different days. 

Freeriding violation example

  • The situation: Mr. Smith starts day zero (the trade date) with $100 of settled cash in his account, and buys $1,000 of XYZ stock. The remaining $900 needed to fully pay for the trade is due by the settlement date, day two (T+2). On the day before settlement (T+1), before fully paying for the security with settled funds, Mr. Smith sells his XYZ shares for $1,500.
  • The violation: Because Mr. Smith sells the stock before paying for its purchase, the sale results in a freeriding violation.
  • The consequence: Industry regulations require the brokerage firm to freeze the account for 90 days, during which time trading is restricted to the amount of settled funds available. Schwab cannot waive this restriction. However, if funds are deposited promptly (within the payment period, generally five business days after the trade date) to cover the entire purchase, the violation may be downgraded to a good-faith violation.

Liquidation violations in a cash account occur if you sell securities after the purchase date of a new trade in order to cover that new trade. The primary difference between a liquidation and a freeride, is that with the liquidation you are selling securities other than the one(s) purchased. 
In a margin account, liquidation violations occur if the account has closed with both a Fed call and a regulatory maintenance call, and you sell securities in the account to cover the call. 

  • A Fed call represents the deposit amount needed to meet the Federal Reserve Board’s Regulation T requirement for trades in a margin account. The “Reg T” minimum initial equity requirement for purchasing an equity security in a margin account is generally 50%.
  • A maintenance call occurs when a brokerage account falls below the brokerage firm’s established minimum equity requirement. Schwab’s maintenance requirement for equity securities is generally 30% of current market value, though this amount may vary, depending on the type of security. A regulatory maintenance call occurs when the account falls below the regulatory minimum requirement, which is 25% for equity securities.

Note: Liquidation violations are based on trade dates, not settlement dates. 

Liquidation violation example

  • The situation: Mr. Lee starts day zero (the trade date) with settled shares of XYZ stock and $100 in settled cash, and buys UVW stock for $1,000. The remaining $900 in settled funds needed to fully pay for the UVW purchase is due by the settlement date, day two (T+2). On day two, rather than deposit cash in his account, Mr. Lee places an order to sell his XYZ stock.
  • The violation: Mr. Lee needs to provide settled cash by the settlement date, but instead he initiates a sell order on the settlement date (the proceeds of which won't settle until day four). Because Mr. Lee elected to sell securities on a subsequent day rather than bringing in funds to meet the trade obligation he incurs a liquidation violation. Note that if Mr. Lee had sold enough settled, fully-paid-for shares on the same trade date as the buy of UVW, there would be no violation.
  • The consequence: The first liquidation violation in an account generally results in a notification, but no restriction. However, the second through fourth combined non-freeride violations in a rolling 12 month period will result in a 90-day settled-cash restriction, during which time trading is limited to the amount of settled funds available. The fifth violation of any kind will generally result in a permanent settled-cash restriction. A one-time exception (once in the life of the account) can be used by the client to remove a 90-day settled-cash restriction. 

If a client does not make payment on a purchase of stock, or deliver shares for a sale of stock, within the designated time frame, Schwab must either request an extension for the client or buy back or sell out the position. There are different practices for extensions on purchases and sales. Contact a Schwab trading specialist for more information. Schwab does not grant extensions of time for trades in retirement accounts (IRA’s, SEP’s Keogh’s, etc), or accounts with an existing trading restriction.

If a client doesn't take action upon notification, industry regulations require that Schwab take market action, and note the account with a freeriding violation. The account may also be placed on a settled-cash-up-front restriction for 90 days or incur more severe penalties, including account closure or removal of electronic access.

What are some common situations that can lead to settlement violations?

I accidentally placed the trade in the wrong account. 
It can happen to the most careful of investors. You think you're placing a trade in your margin account, only to find you've accidentally placed it in your IRA. If you place a trade in the wrong account, contact a Schwab trading specialist immediately at 800-435-9050. Closing out the position right away yourself may cause a violation in the cash or IRA account. In many cases, Schwab can request a cancel and rebill to move the trade to the intended account. 

I traded a non-marginable security in my margin account. 
If you buy a security that's not marginable (Note: this is different from a marginable security that has a current margin equity requirement of 100%), settled funds are required for full payment. Consequently, a settlement violation can occur in a margin account if you buy and then sell a non-marginable security before settled funds have covered the purchase. The order verification screen will alert you if a stock is not marginable. If you're not confident that you can commit to holding a non-marginable security for at least three trading days, consider limiting your purchase to settled funds only. 

I placed a day trade in my cash account. 
Each time a stock trade is completed in a cash account, those funds will not settle for a full two trading days. Since a trade held less than two days in a cash account requires settled funds to avoid a good-faith violation, it may become necessary to wait at least two days between trades so that the day trades or short-term trades can be done using settled funds only. Limiting very short-term trades to settled funds will help reduce the risk of violating settlement rules. 

A bracket or alert fired in my cash account during the settlement period. 
When a bracket or alert is attached to a security you bought with unsettled funds in a cash account, there's a possibility that the exit trigger (e.g., sell stop, trailing stop, profit exit, etc.) will fire, closing the position and causing a settlement violation. If you feel you need immediate protection on the position via an alert or bracket, consider using settled funds for the purchase, in case the exit is triggered during the settlement period. 

Alternatively, you could delay activating the alert or exit parameter until the first day the position can be sold without violation (either the settlement day for the purchase, or the settlement day for the funds used to make the purchase). If you decide to both make the purchase with unsettled funds and immediately attach a bracket or alert, consider giving an additional cushion to the exit parameter(s) to lower the risk of execution within the settlement period (you can always update your exit parameters when the cushion is no longer necessary). 

I hope this enhanced your understanding of trading. I welcome your feedback—clicking on the thumbs up or thumbs down icons at the bottom of the page will allow you to contribute your thoughts. 

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