SEC Adopts T+1 Settlement Cycle

In addition to shortening the settlement cycle, the rules will improve the processing of institutional trades, regulator says.

The Securities and Exchange Commission had adopted a new rule aimed at shortening trade settlement cycle for most broker-dealer transactions, in an effort to avoid crises like the one caused by 2021’s meme stock trading.

“I support this rulemaking because it will reduce latency, lower risk, and promote efficiency as well as greater liquidity in the markets,” said SEC Chair Gary Gensler in a statement after the Wednesday vote. “Taken together, these amendments will make our market plumbing more resilient, timely, orderly, and efficient.”

The new rule that has been adopted will reduce the settlement cycle for securities transactions from two days to one.

Jessica Wachter, the SEC’s chief economist and director of the division of economic and risk analysis, explained during Wednesday’s hearing that the time between the execution of a trade and when it is considered final, known as the settlement cycle, can pose certain risks to market actors. Those risks can include a substantial market price change in the asset or that one of the parties will fail to fulfill its obligations. Reducing the cycle to one day is intended to reduce these risks.

SEC Commissioner Caroline Crenshaw, who voted to adopt the rule, explained in her statement that the shortened cycle “should reduce the number of outstanding unsettled trades, reduce clearing agency margin requirements, and allow investors quicker access to their securities and funds. Longer settlement periods, on the other hand, are associated with increased counterparty default risk, market risk, liquidity risk, credit risk, and overall systemic risk.”

Commissioner Jaime Lizárraga connected the rule change to January 2021 price volatility caused by “meme stocks,” which resulted in multiple class action lawsuits.

“The Commission has taken various actions to prevent another meme stock-type event from impacting the markets, including the recently proposed equity market structure reforms that address, among other things, best execution for retail investors,” Lizárraga said in a statement. “Shortening the settlement cycle to T+1 complements these reforms and helps mitigate some of the risks that drove stock price volatility and significant margin calls during the meme stock event.”

The rule was adopted by a 3-2 vote. Commissioners Hester Peirce and Mark Uyeda asked that the Commission postpone the compliance date to September 3, 2024 from May 28, 2024. This would allow more time for compliance and would also match the compliance date of a similar rule in Canada. The Investment Adviser Association supported the later compliance date in an emailed statement, citing the Canadian rule. Uyeda also expressed concern that a shortened cycle would leave less time to correct errors.

Despite those objections, the rule was adopted with a compliance date of May 28, 2024.

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