February 10, 2022
Settling Trades: SEC Proposes “T+1”
The SEC announced yesterday that the Commissioners voted to propose “market plumbing” rules that would shorten the settlement cycle for most broker-dealer transactions from T+2 to T+1 – i.e., trades would settle one business day after the trade date – aimed at addressing one of the areas identified by the Staff Report on 2021 market volatility. A shortened settlement cycle is something that industry groups have been recommending – I most recently blogged about that in December – and all 4 of the current Commissioners issued statements in support of the proposal (Gensler, Lee, Peirce, Crenshaw).
As explained in the 247-page proposing release – and the accompanying 2-page fact sheet – the proposal also goes beyond merely shortening the settlement cycle to T+1. 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)(by March 31, 2024);
– 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 (T+0); and
– Facilitate straight-through processing by proposing new requirements applicable to clearing agencies that are central matching service providers (CMSPs) – i.e., fully automated transactions processing.
The proposal also seeks comment on the path toward same-day settlement (T+0). In her statement, Commissioner Peirce laid out specific issues for which she would like comments:
(1) Would a T+0 settlement cycle unnecessarily increase trading costs, including in some cases potentially requiring prefunding of transactions?
(2) Would it force other changes that may significantly affect market structure in ways that decrease liquidity?
(3) Would blockchain technology be useful in facilitating the transition to a T+0 timeframe?
(4) How could the Commission go about working with the market to make the transition to T+0 if it does in fact seem worthwhile?
– Liz Dunshee