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.