Regulation T Free-Riding After T+1: The Payment Period Is Now T+3
Updated October 2026, after T+1 took effect. First published February 2024.
When this post first ran in February 2024, T+1 was three months away, and it argued that a shorter cycle would make free-riding easier to get away with. The rule text never changed. What changed is the calendar it points to. Regulation T defines the payment period as the number of business days in the standard U.S. settlement cycle under SEC Rule 15c6-1(a), plus two. Rule 15c6-1(a) has required settlement by T+1 since May 28, 2024, so the payment period now ends on the third business day after trade date.
This post covers the clocks in 12 CFR 220.8, what each one means in days now, and the two that didn't move at all. For what free-riding is and why brokers have tolerated it, see our 2014 post How Risky Is Your Free Ride? For what a deposit-fraud scheme looks like on the T+1 clock, see our post on the SEC's Freeman case.
A Payment Period That Moves by Itself
The Federal Reserve Board built the formula in 1994, when the SEC was moving the market from five-day settlement to T+3. Regulation T had a fixed seven-business-day period for payment. The Board replaced it with "payment period" and wrote in its October 25, 1994 final rule that future changes by the SEC "would be automatically incorporated in the Board's rule without the necessity of further amendment." The same notice says Regulation T "remains a trade date based regulation," which is why every deadline below counts from the trade.
| Standard cycle | In effect | Payment period ends |
|---|---|---|
| T+3 | 1995 to September 2017 | T+5 |
| T+2 | September 2017 to May 2024 | T+4 |
| T+1 | Since May 28, 2024 | T+3 |
FINRA said the same thing in Regulatory Notice 23-15 (September 5, 2023): the payment period shortened from T+4 to T+3, and firms had to file Regulation T extension requests on the T+1 basis from May 31, 2024.
Each Clock in 220.8, Counted in Days
Take a hypothetical: a customer buys a listed stock in a cash account on a Monday, in a week with no holidays.
- Monday (T). The firm can accept the order if the account has the funds, or if it accepts in good faith the customer's agreement to pay in full promptly and the customer "does not contemplate selling it prior to making such payment" (220.8(a)(1)).
- Tuesday (T+1). The trade settles.
- Thursday (T+3). The payment period ends. If full payment hasn't arrived, the firm must promptly cancel or liquidate the unpaid part (220.8(b)(4)). It may ignore a shortfall of $1,000 or less.
- Before Thursday ends. If the firm wants more time, it applies to its examining authority under 220.8(d). The rule requires the application to be filed and acted on before the payment period ends. If FINRA is your examining authority, the request goes through its REX system.
Settlement and payment are two different deadlines. The trade settles on Tuesday whether or not the customer has paid; the customer's deadline is Thursday. That two-day gap is the same width it was under T+2. Everything just moved one day earlier.
The Freeze and Its Two Exceptions
The free ride is the sale before payment. Under 220.8(c)(1), if a nonexempted security in the account is sold, or delivered to another broker or dealer, before the customer has paid for it in full, the account loses the privilege of delaying payment beyond trade date for 90 calendar days after the sale. One sentence in that paragraph catches people out: cancelling the trade, other than to correct an error, counts as a sale. So a cancel for nonpayment on T+3 starts the freeze too.
Two exceptions in 220.8(c)(2) switch the freeze off:
- Full payment arrives within the payment period, or the customer's check clears within it, and the sale proceeds weren't withdrawn before that happened.
- The purchased security went to another broker or dealer for deposit in a cash account that holds enough funds to pay for it. The firm may rely on that broker's written statement, accepted in good faith.
The first exception is easy to overlook. A customer who buys on Monday and sells on Tuesday hasn't earned a freeze yet if full payment lands by Thursday and the sale proceeds stay put until it does. Paying by check is the harder case: the rule says the check has to clear inside the payment period, not just arrive, and three business days doesn't leave much room for a bank hold.
The second exception is the Letter of Free Funds. On a DVP trade to a custodian that is itself a broker-dealer, the written statement is what keeps the executing broker from freezing the account. Our guide to Regulation T 220.8 and the Letter of Free Funds covers how that exchange works and what records it leaves.
What Didn't Move
Two clocks in 220.8 are written in calendar days, so T+1 didn't touch them. The freeze still runs 90 calendar days from the date of sale. And under 220.8(b)(2), a DVP purchase still gets up to 35 calendar days for payment when delivery is delayed by the mechanics of the transaction rather than the customer's willingness or ability to pay.
Two others moved with the payment period. The shipment extension in 220.8(b)(3) allows extra days for shipping securities, capped at one more payment period, which now means three business days. For a foreign security, 220.8(b)(1)(ii) allows payment within one payment period of trade date or within one day after the date the foreign market requires settlement, capped at the DVP maximum. That clause refers to the foreign market's own settlement date, which for U.K. and EU shares becomes T+1 on October 11, 2027.
One more thing the regulation doesn't contain: "good faith violations." Some retail brokers' published cash-account rules count them and restrict an account after a set number in 12 months. That count is firm policy. The text of 220.8 has two triggers, the sale before payment and the missed payment period, and the remedies above.
What to Check in Your Own Procedures
- Your cash-account surveillance computes the payment period as T+3 on a business-day calendar, and its holiday file is current.
- Extension requests reach FINRA before the end of T+3, not on the morning after.
- Your liquidation procedures treat a cancel for nonpayment as a sale that starts the 90-day freeze.
- If you lift freezes under the first exception, your system checks that the sale proceeds stayed in the account until payment arrived or the check cleared.
If your DVP trades settle at broker-dealer custodians, the written statement in 220.8(c)(2)(ii) is the record that matters. Freefunds Verified Direct (FVD) sends the request, logs the custodian's response and each status change, and keeps them in write-once storage.
This post is for informational purposes only and does not constitute legal advice. For guidance on specific regulatory obligations, consult your counsel or compliance advisor.