In 2023, the SEC adopted a number of new rule amendments intended to reduce risks in the clearance and settlement processes, including, significantly, a change that 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. Among other things, 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. (See this PubCo post.) According to the press release issued at the time, the final rule was “designed to benefit investors and reduce the credit, market, and liquidity risks in securities transactions faced by market participants.” The compliance date for the rule is now upon us—May 28, 2024. Yep, that’s right after this Memorial Day holiday.
Earlier this week, SEC Chair Gary Gensler issued a statement on the conversion to a T+1 standard settlement cycle, observing that for “everyday investors who sell their stock on a Monday, shortening the settlement cycle will allow them to get their money on Tuesday. Shortening the settlement cycle also will help the markets because time is money and time is risk. It will make our market plumbing more resilient, timely, and orderly. Further, it addresses one of the four areas the staff recommended the Commission address in response to the GameStop stock events of 2021.”
As the statement further indicates, the SEC has, over time, implemented a number of amendments abbreviating the standard settlement cycle from five business days to three business days (T+3) in 1993 and then to T+2 in 2017. While these transitions were successful, the statement cautions, “transition to a shorter settlement cycle may lead to a short-term uptick in settlement fails and challenges to a small segment of market participants. Despite such expected issues, the SEC has seen with each transition that shortening the settlement cycle benefits investors and reduces the credit, market, and liquidity risks in securities transactions faced by market participants.” Since the vote, the statement continues, the SEC has been monitoring the process and coordinating internationally.
In March, to help market participants prepare for the upcoming move to T+1, the staff of the Division of Examinations published a risk alert, the staff of the Divisions of Trading and Markets and of Investment Management published responses to frequently asked questions, and the SEC’s Office of Investor Education and Advocacy published an Investor Bulletin.
It’s worth noting that there were a number of comments on the T+1 proposal in 2023 advocating that the SEC move to T+0. And, in the adopting release, the SEC recognized “that shortening the settlement cycle further than T+1 could ultimately produce considerable additional benefits to investors compared with shortening the settlement cycle to T+1.” Nevertheless, the SEC “continues to believe that shortening the settlement cycle to T+0 would require the industry to develop solutions to the many challenges identified by market participants as impediments to such a move….Given the operational and technological challenges associated with moving to a T+0 settlement cycle, the Commission believes that a successful move to T+0 would take longer to design and implement, and cost more than, a successful move to a T+1 settlement cycle.” Still, the SEC viewed the transition to a T+1 settlement cycle as a potential “useful step in identifying potential paths to T+0 settlement.” So stay tuned on that one. As Gensler once suggested, could we soon be looking at “T+evening”?
Have a great Memorial Day holiday!
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