by Cydney Posner
At an open meeting this morning, the SEC voted to adopt an amendment to Rule 15c6-1 under the Exchange Act to shorten the standard settlement cycle for most broker-dealer transactions from three business days after the trade date (T+3) to two business days (T+2), unless otherwise expressly agreed to by the parties at the time of the transaction. According to the press release, the “amended rule is designed to enhance efficiency, reduce risk, and ensure a coordinated and expeditious transition by market participants to a shortened standard settlement cycle.” September 5, 2017, which follows a long weekend, has been set as the compliance date.
In his opening statement, Acting Chair Michael Piwowar noted that “rarely is an issue as commonsensical or broadly supported as this one.” Commissioner Kara Stein commented in her opening statement that “[w]hile trading is now nearly instantaneous, the final step in the securities settlement process is not. Today’s amended rule is an attempt to catch up with technology developments in the world around us. The current settlement cycle standard of three days after a trade is woefully behind the times. Currently, standards vary around the globe, but most are moving to shorter settlement cycles….Elongated settlement cycles have been associated with increased counterparty default risk, market risk, liquidity risk, credit risk and overall systemic risk. Longer settlements may also contribute to inefficiencies in how capital moves from investors to companies.”
An SEC staff member commented at the meeting that SEC action was necessary to coordinate among the participants. The preparations for the transition have been ongoing, with the assistance of an industry steering committee. The SEC has already approved the rules proposed by Nasdaq and the NYSE to shorten the settlement cycle to two days.
SideBar: Yikes, won’t it be extremely difficult to close and settle a public offering under T+2? Not to worry. Notably, the change to T+2 does not affect the express exception under the Rule for firm commitment offerings. Rule 15c6-1(c) provides an exemption for contracts for the sale of cash securities that priced after 4:30 p.m. EST that are sold by an issuer to an underwriter pursuant to a firm commitment offering registered under the Securities Act or the sale to an initial purchaser by a broker-dealer participating in the offering, provided that the broker or dealer cannot enter into a contract that provides for payment of funds and delivery of securities later than the fourth business day after the date of the contract unless otherwise expressly agreed to by the parties at the time of the transaction. And, under Rule 15c6-1(d), parties to a contract are deemed to have expressly agreed to an alternate date for payment of funds and delivery of securities at the time of the transaction in a firm commitment offering if the managing underwriter and the issuer have agreed to that date for all securities sold in the offering and the parties to the contract have not expressly agreed otherwise. While it’s certainly possible that, in light of T+2, underwriters may choose to accelerate the settlement date, the economic analysis in the adopting release indicates that “market participants involved in offerings that currently settle by the fourth business day under Rule 15c6-1(c) will likely continue to settle by T+4.”
Will T+1 be the next shoe to drop? Commissioner Stein observed at the meeting that “more can and should be done.” To that end, she asked the staff “to study not only the changes resulting from a movement to a T+2 settlement cycle, but also to consider further improvements.” The study is due to the SEC in three years.
