SEC Proposes To Shorten Securities Trade Settlement Cycle

The SEC proposed to shorten the standard settlement cycle for broker-dealer transactions from two business days after the trade date (T+2) to one day after the trade date (T+1).

In order to facilitate the (T+1) settlement cycle, the proposal would require broker-dealers and investment advisers to accelerate the process of confirming and affirming trade information necessary to prepare a transaction for settlement so that it is completed by the end of the trade date. Certain clearing agencies would be required to facilitate straight-through processing. The SEC stated that the proposal is "designed to reduce the credit, market, and liquidity risks in securities transactions faced by market participants and U.S. investors.

Proposed Amendments

The SEC's Proposed Amendments include, among other things:

• Amending SEC Rule 15c6-1 ("Settlement Cycle") to Establish a Settlement Cycle of T+1 for Broker-Dealer Transactions: The SEC would (i) eliminate the T+4 settlement cycle for new issues, repealing Rule 15c6-1(c) for certain firm commitment offerings, and (ii) adopt new Rule 15c6-2 requiring broker-dealers to complete the allocation, confirmation and affirmation processes no later than the end of the trade date to complete the settlement within the required timeframes under Rule 15c6-1(a).
• Facilitate Straight-through Processing: Clearing agencies would be required to establish, implement, maintain and enforce procedures to facilitate straight-through processing for transactions under proposed Rule 17Ad-27. Under this proposed rule, a central matching service provider also will have to generate and submit a report every 12 months concerning (i) its current policies and procedures for facilitating straight-through processing, (ii) its progress in facilitating straight-through processing during the 12-month period covered by the report, and (iii) the steps the clearing agency intends to take to facilitate and promote straight-through processing during the 12-month period that follows the period covered by the report.

Comments on the proposed amendments will remain open for 60 days following publication of the proposing release on the SEC's website on April 11, 2022, or for 30 days following publication of the proposing release in the Federal Register - whichever is later.

Commissioner Statements

SEC Chair Gary Gensler supported this release saying "it could lower risk to the financial system and drive greater efficiencies in the markets." He also stated that the release would (i) shorten the standard settlement cycle, which should "reduce the amount of margin that counterparties would need to post with clearinghouses," and "would lower risk to and promote greater efficiency in the highly interconnected financial system," (ii) require trade affirmations, confirmations and allocations to occur on trade date T+0, which "further lowers risk in the system," and (iii) require clearing agencies that provide central matching services to have procedures to facilitate straight-through processing.

SEC Commissioner Allison Herren Lee supported the proposal asserting that a reduction in the time that it takes to settle transactions also reduces risk. She stated that such a risk reduction would "result in cost savings throughout the system as less margin is required by clearing agencies." She also added that a shorter timeframe (i) "reduces the volume and market value of unsettled trades," (ii) "reduce[s] clearing agency margin requirements," and (iii) enables investors to have access to their funds and securities sooner.

SEC Commissioner Caroline A. Crenshaw supported the proposal. She noted that the increasing pace of technological advancements is a reason for which shortening the standard settlement cycle may be "desirable and feasible." She also stated that longer settlement periods could lead the way for other types of risk, including counterparty default risk, market risk, liquidity risk, credit risk and overall systemic risk.

SEC Commissioner Hester M. Peirce supported the proposal. She said that shortening the settlement cycle should "reduce settlement risks and clearing costs" when there is "high volume and volatility."

Commentary

In theory, reducing the time periods for which a trade is open and unsettled cuts risk. In practice, whether this is operationally feasible is the question. The various market participant organizations all seem to be supportive, so presumably it can be done.

Primary Sources

1. SEC-Proposed Rule: Shortening the Securities Transaction Settlement Cycle
2. SEC Fact Sheet: Reducing Risk in Clearance and Settlement
3. SEC Press Release: SEC Issues Proposal to Reduce Risks in Clearance and Settlement
4. SEC Chair Gary Gensler's Statement of Support
5. SEC Commissioner Allison Herren Lee's Statement of Support
6. SEC Commissioner Caroline A. Crenshaw's Statement of Support
7. SEC Commissioner Hester M. Peirce's Statement of Support
8. SIFMA Statement on SEC Proposal to Accelerate the Settlement Cycle

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.