United States: The SEC Proposes To Shorten The Settlement Cycle For Most Securities Transactions From Three Business Days To Two Business Days

The Securities and Exchange Commission has proposed to amend Rule 15c6-1 under the Securities Exchange Act of 1934 in order to shorten the standard settlement cycle for most broker-dealer securities transactions from three business days after the trade date to two business days after the trade date. The SEC indicates that, by shortening the standard securities settlement cycle, it expects to enhance efficiency and reduce the risks that arise from the value and number of unsettled securities transactions prior to the completion of the settlement, including credit, market and liquidity risk faced by U.S. market participants, which in turn could reduce systemic risk in the U.S. securities markets. Currently, the standard settlement cycle for most broker-dealer securities transactions is three business days, known as T+3. The proposal, if ultimately adopted, would shorten the settlement cycle to two business days, or T+2.

As proposed, the amendment would prohibit a broker-dealer from entering into a contract for the purchase or sale of a security 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.

Background

The SEC 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 such as for contracts related to exempted securities, government securities, municipal securities, commercial paper, bankers' acceptances or commercial bills), effectively shortening the settlement cycle for such securities transactions from the then-prevailing five business day period to three business days after the trade date (T+3).  At the time, the SEC 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 SEC believes that shortening the standard settlement cycle further to T+2 will result in a further reduction of credit, market and liquidity risk and, as a result, a reduction in systemic risk for U.S. market participants.

Since the SEC adopted Rule 15c6-1 in 1993, not only have the financial markets expanded and evolved significantly, but the 2008 financial crisis has taken place. Shortening the standard settlement cycle is consistent with the current broader focus by the SEC – in part resulting from the financial crisis – on enhancing the resilience and efficiency of the national clearance and settlement system and the role that certain systemically important financial market utilities, particularly central counterparties (so-called FMUs and CCPs), play in concentrating and managing risk. The SEC also notes the significant technological developments in the industry since it first mandated T+3 settlement in 1993, which it believes will help to facilitate further shortening of the settlement cycle.

The proposed amendment to Rule 15c6-1, if adopted, would prohibit a broker or dealer from entering into a securities contract that settles later than the second business day after the date of the contract unless expressly agreed upon by both parties at the time of the transaction, subject, as in the current version of the rule, to certain exceptions. If adopted, the proposal would not affect the current ability in most firm commitment underwritten transactions to use a T+3 or, if priced after 4:30 p.m. U.S. Eastern time, a T+4 settlement cycle; nor would it affect the ability of the parties to any particular transaction to agree expressly to a settlement cycle that is longer than T+2.

Request for Comment

The SEC is requesting comment regarding all aspects of the proposed amendment to Rule 15c6-1. The SEC is also requesting comment on a number of specific questions set forth in the proposing release. Not only is the SEC seeking comments, it is also asking commenters to submit any relevant data or analysis along with their comments. You can find the proposal, along with information on how to submit comments, on the SEC website. Comments must be submitted prior to December 5, 2016.

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