In the 1920s, Wall Street cleared and settled trades by the end of the day after the trade instruction (“T+1”). Over the years, that cycle bloated to T+4, to T+3 in 1993, and then T+2 in 2017. Last week, the SEC proposed to go back to that old standard in a new way, shaving a day off the current T+2 clearing and settlement cycle. The SEC and industry participants agree that adopting a “T+1 standard settlement cycle could produce greater reductions in market, credit, and liquidity risk for market participants.”

The Rule Proposal builds on the industry’s recent work on the issue, especially the joint task force of Deloitte, Depository Trust and Clearing Corporation (“DTCC”), the Investment Company Institute (“ICI”), and the Securities Industry and Financial Markets Association (“SIFMA”), Accelerating the U.S. Securities Settlement Cycle to T+1 (Dec. 1, 2021) (“T+1 Report”).

The Rule Proposal contains an overview of the clearing and settlement processes and how they’ve changed over time. It also contains a nod to the January 2021 “meme stock” short squeeze incidents that pushed clearing and settlement issues into public consciousness.

The Release generally adopts the Plan laid out in the T+1 Report, and proposed some new implementing regulations:

• Same Day Affirmation of trade details between broker-dealers and their institutional clients, underwritten agreements required by new Rule 15c6-2, with concomitant record-keeping requirements on customer-side investment advisers.
• Straight-Through Processing by clearing agencies, by requiring written policies and procedures on the adoption and implementation of a fully-automated process end-to-end. The Commission chose that approach, under new Rule 17Ad-27, to allow flexibility and response to technological changes over time.

The Proposal also seeks comment on “Pathways to T+0,” including among those candidates a pilot program akin to DTCC’s digital-ledger technology (“DLT”), “Project ION.” I discussed that proposal here: DTCC’s Feb. 24, 2021 White Paper . Others, like Paxos and JPMorgan, have been using private, permissioned DLT for peer-to-peer settlement with their clients since as early as 2020, here. Yet, that same industry working group concludes that T+0 settlement poses more risks and operational impediments than benefits – at least for now. See more.

The Commission proposes an implementation date of March 31, 2024.

Rel. No. 34-94196, File No. S7-05-22 (Feb. 9, 2022), can be found here.

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