Canadian Couch Potato

These days we’re used to financial transactions that happen instantly. Buy groceries with your debit card and you see your bank account updated immediately. Send a friend money with an Interac transfer and it’s in their hands in seconds. Yet when you buy or sell an ETF or mutual fund, the trade doesn’t settle for three business days, a practice known as T+3. It’s a convention that seems as outdated as traveller’s cheques.

The good news is this is about to change: on Tuesday, September 5, markets in Canada and the United States will be moving to a T+2 cycle, with settlement two business days after the trade.

This change will mostly affect financial institutions and their intermediaries, but if you regularly buy ETFs, mutual funds, and other investments through an online brokerage there are a number of details you should understand.

Out of order

Before diving into the details, let’s review what settlement means in this context. A trade is considered settled when the buyer has delivered the cash to the seller, at which point ownership of the security officially changes hands. Strictly speaking, you don’t have to pay for your ETF or mutual fund units until three business days after you make the purchase.