A rule amendment to shorten the standard settlement cycle for most broker-dealer securities transactions from three business days after the trade date (T+3) to two business days after the trade date (T+2) was proposed by the Securities and Exchange Commission this week.
The proposed amendment, advanced for public comment on Set. 28, is designed to reduce the risks that arise from the value and number of unsettled securities transactions prior to the completion of settlement, including credit, market, and liquidity risk directly faced by U.S. market participants.
“Today’s proposal to shorten the standard settlement cycle is an important step in the SEC’s ongoing efforts to enhance the resilience and efficiency of the U.S. clearance and settlement system,” SEC Chair Mary Jo White said in a statement. “The benefits of a shortened settlement cycle should extend to all investors, not just those directly involved in the trading, clearing and settling of securities transactions.”
The Commission’s proposal would amend Rule 15c6-1(a) of the Exchange Act to shorten the standard settlement cycle for broker-dealer transactions from T+3 to T+2, subject to certain exceptions.
As proposed, the amendment would prohibit a broker-dealer from entering into a contract for the purchase or sale of a security (other than an exempted security, government security, municipal security, commercial paper, bankers’ acceptances, or commercial bills) that provides for payment of funds and delivery of securities later than two business days after the trade date, unless otherwise expressly agreed to by the parties at the time of the transaction.
The Commission originally adopted Exchange Act Rule 15c6-1 in 1993 to establish a standard settlement cycle for most broker-dealer securities transactions (subject to the exceptions provided in the rule), effectively shortening the settlement cycle for most securities transactions from five business days to three business days after the trade date (T+3). It cited a number of reasons for standardizing and shortening the settlement cycle, which included, among others, reducing credit and market risk exposure related to unsettled trades, reducing liquidity risk among derivatives and cash markets, encouraging greater efficiency in the clearance and settlement process, and reducing systemic risk for the U.S. markets.
The public comment period will remain open for 60 days following publication of the proposing release in the Federal Register.
“In moving forward today, it is critical that we maintain an unwavering commitment to act in the best interests of investors and the markets. Important voices—from the Investor Advisory Committee to many large institutional investors—have already been heard on these issues,” White said. “Today’s proposal will solicit input from a wider audience as to the benefits and costs of a T+2 standard settlement cycle, as well as alternatives such as T+1 or T+0.”
“Given the advances in computer hardware and software already in use by market participants, the move to T+2 is not only possible, but also should lay the groundwork for an even shorter settlement cycle,” Commissioner Kara Stein said. Reducing the settlement cycle, however, will involve changes and costs. “Market participants will need to consider how reduced settlement cycles fit within the larger clearance and settlement ecosystem, and the possible impact on payment systems as a whole,” she said.
The proposal will “align trade processing in the United States to many other global markets,” Commissioner Michael Piwowar said. “Years from now, investors will be puzzled about how a T+3 settlement cycle existed for so long. As such, this proposal is a ‘no-brainer,’ a ‘slam-dunk,’ a ‘cakewalk’—pick your favorite metaphor."