Regulation T (Reg T) governs the extension of credit by broker-dealers in both margin and cash accounts and establishes payment and settlement rules intended to prevent credit abuses. In cash accounts, Reg T prohibits “freeriding”, which occurs when an investor buys and then sells a security without first paying for the purchase, instead using the sale proceeds to cover the original buy. When freeriding occurs, the broker-dealer must restrict the cash account for 90 calendar days; during this period, purchases must be fully paid on or before the trade date (i.e., cash in the account before entering the order), or the investor must have sufficient settled cash at the time of trade.
Because equity and many fixed income trades settle after the trade date, a timing gap can create cash-account violations if proceeds from a sale are reused before they become “settled funds”. Freeriding is distinct from other common cash-account violations (e.g., good faith and cash liquidation violations), but only freeriding triggers the Reg T 90-day restriction in 12 CFR §220.8(c).
On February 15, 2023, the SEC adopted amendments to shorten the standard settlement cycle for most broker-dealer transactions from T+2 to T+1, with a compliance date of May 28, 2024. Under 17 CFR §240.Rule 15c6-1, most equity, ETF, and corporate bond trades now settle one business day after the trade date. For example, a sale on Monday settles on Tuesday. Certain transactions are excluded or may follow different settlement cycles (e.g., firm commitment offerings priced after 4:30 p.m. ET, security-based swaps, and negotiated same-day settlement). Investors who hold physical certificates may need to deliver them earlier; investors in margin accounts should review any margin agreement updates reflecting T+1 operational changes.
Practical implications for cash and asset-backed lending:
With T+1, funds from sales become settled the next business day. Reusing proceeds before settlement can still cause violations; using unsettled proceeds to pay for a purchase and then selling that same security to cover the obligation is freeriding and is prohibited. Broker-dealers will impose a 90-day “cash-only” restriction after a freeriding violation.
Using margin credit can avoid freeriding because the broker-dealer extends credit under Reg T, allowing purchases without waiting for settlement. By contrast, SBLOCs extended by banks or affiliates are generally governed by Regulation U. Most SBLOCs are structured as “non-purpose” credit, meaning proceeds cannot be used to buy or carry “margin stock” (i.e., publicly traded securities) as defined in Reg U. Using an SBLOC to purchase securities may violate the non-purpose covenant and applicable credit regulations. Always confirm permitted uses with the lender and review Reg T/Reg U constraints before employing asset-backed credit for trading.