The SEC has adopted an amendment that will shorten the standard settlement cycle for most broker-dealer securities transactions by one business day, from three business days (T+3) to two business days (T+2) under Securities Exchange Act Rule 15c6-1(a). According to the adopting release, the amendment is designed to enhance efficiency, reduce risk, and ensure a coordinated and expeditious transition by market participants to a shortened standard settlement cycle for these transactions. As noted in the adopting release, many foreign securities markets have already moved to T+2 or shorter settlement cycles. This amendment is the first change in the standard settlement cycle for broker-dealer trades since 1993, when the SEC shortened this cycle from T+5 to T+3.
The amendment will be effective 60 days after publication in the Federal Register. Broker-dealers will be required to comply with the amended rule beginning on September 5, 2017. To assist broker-dealers, other securities professionals and the investing public in their preparation for the implementation of a T+2 settlement cycle, the SEC has established an e-mail address for submission of inquiries to the SEC staff: T2settlement@sec.gov.
Impact on Other Settlement Cycles
The amended rule does not affect the current ability to specify a T+3 or T+4 settlement cycle for firm commitment offerings registered under the Securities Act of 1933 that are priced after 4:30 p.m. Eastern Time under Rule 15c6-1(d).
In addition, parties to a trade will continue to be able to agree affirmatively to settlement on a longer cycle at the time they enter into a transaction under the “override provision” of Rule 15c6‑1(a). That agreement would generally be disclosed in the offering document for the transaction or, if there is no offering document, in the confirmation for the trade.
Although the SEC did not amend any other rules governing settlement cycles for securities transactions, the adopting release points out that the amended rule will reduce market participants’ timeframes for compliance with some other rules. These include reducing the time available (1) to effect a close-out under Rule 203 of Regulation SHO, (2) to comply with the “buy-in” requirement in Rule 15c3-3(m) and (3) to send transaction confirmations to customers pursuant to Securities Act Rule 10b-10. The adopting release also notes that the T+2 settlement cycle will reduce the time available for prime brokers to disaffirm trades and will reduce the margin for operational difficulties in settlement of securities that are not eligible for “access equals delivery” under Securities Act Rule 172.
Potential Future Reduction of Settlement Cycles
The SEC states in the adopting release that a further reduction to a T+1 standard settlement cycle could have qualitative benefits of market, credit, and liquidity risk reduction for market participants similar to those expected to result from adoption of the T+2 standard settlement cycle. The SEC staff will therefore submit a report to the SEC no later than September 5, 2020. The report will include an examination of the impact of the current T+2 amendment, potential impact resulting from adoption of a settlement cycle shorter than T+2, and identification of technological and operational improvements that could facilitate a shorter settlement cycle, among other topics.
Related Stock Exchange Rule Amendments
On February 10, 2017, the SEC approved rulemaking proposals submitted separately by the New York Stock Exchange, the Nasdaq Stock Market and the NYSE MKT that will conform stock exchange rules to the amendments to Rule 15c6-1, with the amendments to become operative concurrently with the SEC compliance date. The stock exchanges will publicize the effective date of these amendments through their regular communication channels.
John O. NewellCounsel
Bradley C. WeberPartnerCo-Chair, Capital Markets