February 16, 2023
SEC Adopts T+1 Settlement Cycle
Yesterday, the SEC announced the adoption of rules implementing a T+1 settlement system. Here’s the 314-page adopting release and here’s the 2-page fact sheet. According to this excerpt from the fact sheet, the new rules:
– Shorten the standard settlement cycle for most securities transactions from two business days after trade date (T+2) to one (T+1);
– Shorten the separate standard settlement cycle for firm commitment offerings priced after 4:30 p.m. from four business days after trade date (T+4) to T+2;
– Improve the processing of institutional trades through new requirements for broker-dealers and registered investment advisers related to same-day affirmations; and
– Facilitate straight-through processing through new requirements applicable to clearing agencies that are central matching service providers (CMSPs).
The compliance date for the new rules was set for May 28, 2024. That date follows the Memorial Day holiday, on which both the securities markets and banks will be closed. The two dissenting commissioners – I’ll let you guess who they are – both expressed concern that the change was being implemented too quickly and argued that a post-Labor Day 2024 compliance date would be more appropriate.
Although the new rules provide for T+2 as the default settlement cycle for firm commitment offerings priced after 4:30 pm, they continue to permit issuers and underwriters to agree to alternative settlement dates. Personally, I can’t imagine trying to settle a firm commitment deal on a T+1 or even a T+2 basis. It just seems like there are too many moving pieces that can mess up the closing on a timeframe like that.
Maybe my lack of imagination stems from the fact that most of my experience in recent years has been on the debt side, where extended settlement cycles aren’t uncommon (the last deal I worked on before I left my law firm was a debt deal that settled on a T+10 basis). On the other hand, Meredith told me that she’s done some firm commitment equity deals that have settled on a T+2 basis, which may help explain why she decided to make the move away from private practice!
Meredith also pointed out another consequence of the implementation of a T+1 settlement cycle – the move to T+1 shortens the time lawyers have to decide whether a potentially problematic trade by an insider needs to be broken.
– John Jenkins