Securities Law Blog

At its open meeting scheduled for 10 a.m. on March 22, 2017 at the Securities and Exchange Commission’s Washington, D.C. headquarters, the SEC is scheduled to vote on a rule that would reduce the time frame to settle most trades. The proposed rule amendment would shorten the standard settlement cycle for most broker-dealer securities transactions from three business days after the trade date (T+3) to two business days after the trade date (T+2). The proposal would amend Rule 15c6-1(a) of the Securities Exchange Act of 1934.

The SEC first proposed the rule amendment at its open meeting held on September 28, 2016. Following approval by the then three Commissioners in September, the proposed rule amendment was published in the Federal Register and remained open for public comment for 60 days following such publication. Having reviewed the comments, the SEC is now expected to adopt the proposed amendment as a final rule.

The proposed amendment is designed to reduce a number of risks for brokers and investors that arise from the value and number of unsettled securities transactions prior to the completion of settlement, including lowering liquidity risk and reducing credit and market risk exposure from unsettled trades. Acting SEC Chairman Michael Piwowar repeatedly has called for a reduction in the three-day trade settlement cycle, saying the decrease is a “no brainer,” a “slam-dunk,” and ” a “cakewalk,” as, in addition to reducing credit, liquidity and market risks, he believes it will increase capital efficiency, improve investor protection and align trade processing in the United States to many other global markets.

As proposed, the amendment would prohibit a broker-dealer from entering into a contract for the purchase or sale of a security (subject to certain exempted securities) that provides for payment of funds and delivery of securities later than two business days after the trade date, unless otherwise expressly agreed to by the parties at the time of the transaction. The regulation would not apply to money market funds, options and some other assets, which follow a T+1 settlement time frame and would also exempt government and municipal securities.

The proposed amendment has the support of The Depository Trust & Clearing Corporation (DTCC), along with industry organizations including the Securities Industry & Financial Markets Association (SIFMA), the Investment Company Institute (ICI) and other financial services organizations.