Cash Settlement and Delivery of Securities
With respect to cash accounts, securities traders must pay for purchased securities by the regular way settlement date, meaning that payment must be made by the second business day after the trade date (T + 2), and the securities cannot be remarketed until the payment has been made. With margin accounts, member firms provide a line of credit to cushion the two-day settlement period, allowing customers to trade securities before a settlement is made.
Under Regulation T, customers of member firms who miss the settlement date are offered two additional business days for payment and delivery for both cash and margin accounts. If a customer does not come up with payment by the fourth business day after a trade or after a margin call, the broker-dealer will either close out the transaction or begin selling the customer’s securities to meet the margin call. If a customer has a cash account and sells the security before having paid for it, the customer is guilty of freeriding, and the member will freeze the customer’s account.
Freeriding is the prohibited practice of buying securities and selling them to pay for the securities before the settlement date. Freeriding can only occur in a cash account. Without enough cash in t