“For everyday investors who sell their stock on a Monday, shortening the settlement cycle will allow them to get their money on Tuesday. Shortening the settlement cycle also will help the markets because time is money and time is risk.”
The conversion of the U.S. securities market to a T+1 standard settlement cycle will take place on May 28, 2024, just a few days from now.
In anticipation, SEC Chair Gary Gensler has commented: “For everyday investors who sell their stock on a Monday, shortening the settlement cycle will allow them to get their money on Tuesday. Shortening the settlement cycle also will help the markets because time is money and time is risk. It will make our market plumbing more resilient, timely, and orderly. Further, it addresses one of the four areas the staff recommended the Commission address in response to the GameStop stock events of 2021.”
Earlier this month, FinanceFeeds spoke with industry experts about the upcoming changes and their challenges when it comes to FX.
T+1 reduces credit, market, and liquidity risks
The new rules were announced on February 15, 2023, and are meant to facilitate the shortening of the standard settlement cycle for most broker-dealer transactions from two business days after the trade date (or T+2) to one business day after the trade date (or T+1).
Additionally, they improve the processing of institutional trades by establishing new processing and recordkeeping requirements for broker-dealers and registered investment advisors, respectively. Further, the rules established a new requirement to facilitate straight-through processing by central matching service providers.
Since the SEC voted to establish a T+1 settlement cycle in the U.S., SEC staff has been monitoring on a continuous basis the efforts of market participants to prepare for the shorter settlement cycle and coordinating with regulatory authorities in North America, Europe, Asia, and other jurisdictions around the world.
In March, to help market participants prepare for the upcoming move to T+1, SEC staff published a risk alert, responses to frequently asked questions, and an Investor Bulletin.
From T+5 to T+1 in 3 decades
This is not the first time that the settlement cycle changes:
- Before 1993, the prevailing practice settling securities transactions was within five business days of trade date;
- In 1993, the SEC established a standard settlement cycle of three business days (or T+3) for most securities transactions;
- In 2017, the SEC shortened the standard settlement cycle from T+3 to T+2.
The regulator stated that while previous transitions were successful, the transition to a shorter settlement cycle may lead to a short-term uptick in settlement fails and challenges to a small segment of market participants.
Despite such expected issues, the SEC has seen with each transition that shortening the settlement cycle benefits investors and reduces the credit, market, and liquidity risks in securities transactions faced by market participants.
