January 26, 2024

Memorial Day Looms Large: A Shorter Settlement Cycle is Just Around the Corner

Traveling from a very snowy mid-Atlantic to a warmer (but very wet) Southern California this week reminded me of how much I miss summer at this time of year. Memorial Day weekend is always the unofficial start of the summer season, and this year it will serve to usher in the T+1 settlement cycle for U.S. securities markets. While I wouldn’t expect a ticker-tape parade to celebrate this momentous occasion, there will certainly be a lot of work in back offices around the country to facilitate the shorter settlement cycle.

Yesterday, SEC Chair Gary Gensler addressed the European Commission on the topic of a shortened settlement cycle, noting in the title of his speech that “Time is Money. Time is Risk.” Citing the meme stock insanity that was unfolding as President Biden took office, Gensler outlined how the market plumbing of clearing and settling transactions matters to the markets and investors, similar to how the plumbing in your house is so important, as demonstrated when your plumbing backs up. Gensler noted:

Shortening the clearance part of the market plumbing (the time to ensure that all parties agree to the trade details) also lowers risk. The sooner the parties have allocated, confirmed, and affirmed the trade information for their transaction, the lower the likelihood of a settlement failing since the parties will have more time to identify and resolve any potential errors. The Bank of International Settlements first recommended T+0 affirmations 22 years ago. A decade later, CPMI-IOSCO reaffirmed this in their Principles for Financial Market Infrastructures.

Shortening the cycle also means reducing the credit, market, and liquidity risks of the clearinghouse.

Lowering risks for market participants and clearinghouses, alike, reduces the likelihood that any one entity’s failure spreads risk to the financial system, making the system safer for everyone.

After providing a history of settlement developments over the years and around the world, Gensler noted the while many Americans will be celebrating the unofficial start of summer over Memorial Day weekend, the U.S. will transition to securities settlements of T+1 on May 28, 2024, returning us to “the settlement cycle that we had in the United States most of the first 50 years of Memorial Days.” Further, starting May 28, 2024, trades relating to initial public offerings will be shortened from T+4 to T+2. Gensler noted that both Canada and Mexico are joining the U.S. in moving to T+1 on Monday, May 27, 2024.

Gensler closed his speech by encouraging the European Union and the U.K. to shorten their settlement cycles to bring them in line with where North America will be when summer kicks off later this year.

– Dave Lynn