Regular-Way Trade (RW): What It Means, How It Works (2024)

What Is a Regular-Way Trade (RW)?

A regular-way trade (RW) is settled within the standard settlement cycle, which, depending on the transaction type, will typically range from one to three business days.

T+1, T+2, and T+3 are the abbreviations that refer to thesettlement dateof security transactions. The "T" stands fortransactiondate, which is the day the transaction takes place. The numbers 1, 2, or 3 denote how many days after the transaction date the settlement—or the transfer of money and security ownership—takes place.

Understanding a Regular-Way Trade (RW)

A regular-way trade (RW) has the typical and defined settlement cycle required for that particular asset.In contrast, a non-regular settlement would have a shorter or longer settlementcycle, allowing for a quicker, or delayed, transfer of fundsand the assetbetween the seller andthe buyer.

The settlement cycle is a defined period, preset by regulators of that market, for the buyer to complete payment or for the seller to deliver the assets traded. The settlement cycle differs for different assets. Most trades are regular-way trades.

The reason for the settlement periodtime lag from a trader to a settlement is to allow both parties to gather the needed resources to complete the transaction. When working with different currencies,it could take time for funds deposited in the buyer's account to become available for disbursem*nt. Likewise for physical certificates or assets needed to move from the seller to the middle or clearing agent.

Speeding Up Settlement

Changes in technology anddigital recording allow for faster, if not instant, settlement of both funds and assets. They also reduce credit, market, and liquidity risk.However, it takes time to change such procedures, even if the desire to do so is there.

As a first step, in 2017, the Securities and Exchange Commission (SEC) approved a new, and shorter, settlement rule called "T+2."Securities transactions in the U.S. were "trade plus two" days, instead of three days. Thischange was in direct acknowledgment of the improvements in technologyand a trading environment thatmade shorter settlements both feasible and valuable to all market participants.

In May 2024, the SEC implemented T+1 settlement for stocks, while also opening the door to potential T+0 (same-day) settlement in the future.

Settlement by Asset Class

Equities trading got the most significant boost from T+1 as settlements were typically two days. Other asset classes already settledin one day, also known as "next day."Weekends and holidays can cause the time between transaction and settlement dates to increase substantially, especially during holiday seasons like Christmas, Easter, and others.

Here are the settlement cycles for some popular assets that, if adhered to, would fall under a regular-way trade (RW):

• Equities settle T+1.
• Government bills, bonds, and listed options settle T+1.
• Spot foreign exchange transactions usually settle two business days after the execution date. A primary exception is the U.S. dollar vs. the Canadian dollar, which resolves the next business day. The foreign exchange marketrequires that the settlement date be a valid business day in both countries.
• Forward foreign exchange transactions settle on any business day that is beyond the spot value date. There is no absolute limit in the market to restrict how far in the future a forward exchange transaction can settle, but credit lines are often limited to one year.