SEC Proposes to Shorten Settlement Cycle to T+1

Stinson - Corporate & Securities Law Blog

Stinson - Corporate & Securities Law Blog

The SEC has issued a rule proposal to reduce risks in the clearance and settlement of securities. Specifically, the proposed changes would:

  • Shorten the standard settlement cycle for securities transactions from two business days after trade date (T+2) to one business day after trade date (T+1);
  • Eliminate the separate T+4 settlement cycle for firm commitment offerings priced after 4:30 p.m.;
  • Improve the processing of institutional trades by proposing new requirements for broker-dealers and registered investment advisers intended to improve the rate of same-day affirmations; and
  • Facilitate straight-through processing by proposing new requirements applicable to clearing agencies that are central matching service providers (CMSPs).

Reducing time between the execution of a securities transaction and its settlement reduces risk. The standard settlement cycle for securities transactions was shortened from T+5 to T+3 in 1993, and from T+3 to T+2 in 2017. In each past instance, shortening the settlement cycle promoted investor protection, risk reduction, and increases in operational efficiency.

According to the SEC, two recent episodes of increased market volatility – in March 2020 following the outbreak of the COVID-19 pandemic, and in January 2021 following heightened interest in certain “meme” stocks – highlighted potential vulnerabilities in the U.S. securities market that shortening the standard settlement cycle and improving institutional trade processing can mitigate.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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