Yesterday, the SEC adopted a number of new rule amendments intended to reduce risks in the clearance and settlement processes. Most significantly for this audience, the changes will reduce the standard settlement cycle for most broker-dealer transactions in securities from T+2 to T+1, that is, from two business days after the trade date to one business day after. According to the press release, the final rule is “designed to benefit investors and reduce the credit, market, and liquidity risks in securities transactions faced by market participants.” The rule changes also shorten the settlement cycle for firm commitment public offerings priced after 4:30 p.m. Eastern Time from T+4 to T+2, unless the parties expressly agree otherwise at the time of the transaction. The final rules will become effective 60 days following publication of the adopting release in the Federal Register; the compliance date is May 28, 2024, which turned out to be the most controversial aspect of the proposal, leading to two dissents. According to SEC Chair Gary Gensler, “[a]s they say, time is money. Halving these settlement cycles will reduce the amount of margin that counterparties need to place with the clearinghouse. This lowers risk in the system and frees up liquidity elsewhere in the market.”
At an open meeting yesterday morning, the SEC voted unanimously to propose shortening of the standard settlement cycle for most securities transactions from T+2 to T+1. The press release can be found here, the fact sheet here and the proposing release here. According to SEC Chair Gary Gensler, “[t]hese proposed amendments to the securities clearing and settling process, if adopted, could lower risk to the financial system and drive greater efficiencies in the markets….First, these amendments would shorten the standard settlement cycle. As the old saying goes, time is money. Shortening the settlement cycle should reduce the amount of margin that counterparties would need to post with clearinghouses. Second, these changes would require affirmations, confirmations, and allocations to take place as soon as technologically practicable on trade date (‘T+0’). Finally, the release would require clearing agencies that provide central matching services to have policies and procedures to facilitate straight-through processing—i.e., fully automated transactions processing.” The public comment period—using a new format following complaints that the comment period was too short—will be open for 60 days following publication of the proposing release on the SEC’s website or 30 days following publication in the Federal Register, whichever period is longer.