The Securities and Exchange Commission (SEC) adopted new rules to shorten the standard settlement cycle for most broker-dealer transactions in securities.
Now, the settlement cycle will move from two business days after the trade date, known as T+2, to just one day, called T+1. SEC officials said it will benefit investors with faster processing while also reducing the credit, market, and liquidity risks in the transactions.
“I support this rulemaking because it will reduce latency, lower risk, and promote efficiency as well as greater liquidity in the markets,” SEC Chair Gary Gensler said. “Today’s adoption addresses one of the four areas the staff recommended the Commission address in response to the meme stock events of 2021. Taken together, these amendments will make our market plumbing more resilient, timely, orderly, and efficient.”
Along with shortening the settlement cycle, the new rule will improve the processing of institutional trades. It will do this by requiring broker-dealers to either enter into written agreements or establish policies and procedures to ensure the completion of allocations, confirmations, and affirmations by the end of trade date. In addition, the final rules require registered investment advisers to maintain records of the allocations, confirmations, and affirmations for certain securities transactions.
Also, the new rule adds a new requirement to facilitate straight-through processing, which applies to certain types of clearing agencies that provide central matching services. Central matching service providers must establish and enforce new policies and procedures to facilitate straight-through processing. It also requires them to submit an annual report to the SEC that describes and quantifies progress on straight-through processing.
The final rules will become effective 60 days after publication in the Federal Register. The compliance date for the final rules is May 28, 2024.
SIFMA, the Securities Industry and Financial Markets Association, “strongly supports” the new rule to speed up securities settlement from T+2 to T+1. However, the organization expressed concerns with the implementation date.
“We appreciate the Commission finalizing its rule to provide certainty, but we strongly disagree with the implementation date of May 2024. As we have repeatedly stated for the past two years, the industry needs ample time to execute the transition, and doing so following the Labor Day weekend 2024 in coordination with Canada is the optimal date. It is the industry, and not the regulators, who will do the work to shorten the cycle and rushing the implementation for no apparent reason will only add risk when the underlying goal is to mitigate risk,” SIFMA president and CEO Kenneth E. Bentsen, Jr. said.
He added that SIFMA also supports a ‘policies and procedures’-based approach, which will provide greater flexibility to broker-dealers and their customers regarding the allocation, confirmation, and affirmation process.
Bentsen encouraged market participants to refer to the T+1 Securities Settlement Industry Implementation Playbook, developed by SIFMA, along with the Investment Company Institute (ICI) and the Depository Trust & Clearing Corporation (DTCC). The guide outlines activities, timelines, dependencies, and risks that market participants should consider as they prepare for the transition to T+1 settlement.