Regulation and Compliance Federal Regulation SEC

SEC Shortens Trade Settlement Cycle to 2 Days From 3

March 22, 2017 at 09:42 AM
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The SEC Wednesday approved a rule that shortens the standard settlement cycle for most broker-dealer transactions from three days to two, effective September 5, 2017.

The T+2 rule "is designed to enhance efficiency, reduce risk, and ensure a coordinated and expeditious transition by market participants to a shortened standard settlement cycle," according to an SEC statement.

 "Rarely is an issue as commonsensical or broadly supported as this one," said SEC Acting Chairman Michael Piwowar in a statement. "It is finally time to say hasta la vista to the antiquated T+3 settlement cycle."

Piwowar explained that the old T+3 rule hasn't kept up with improvements in technology, the emergence of new products and increased trading volume at a time when market participants have increased their focus on managing credit, market and liquidity risk.

He said the new rule should decrease market participants' exposure to unsettled trades and any credit, market and liquidity risk that could follow.

Under T+2, an investor buying a security that trades on an exchange — stocks, bonds, municipal bonds, ETFs, certain mutual funds and limited partnerships — must deliver payment to a brokerage firm no later than two business days after the trade is executed. When an investor sells a security, he or she must deliver the security no later than two business days after the sale.

SEC Commissioner Kara Stein, who also voted for the rule change (there are currently only two commissioners on the usual five-member board), lauded the new rule and the expected improvements to come but said more should and can be done. "At this very moment, technological, operational and communications improvements exist that could enable T+1 and end-of-the-day settlement cycles," said Stein in a statement.

She has asked the SEC staff to study not only the impact of the T+2 settlement but further improvements, and deliver a report within three years of the effective date of the T+2 rule, meaning September 2020.

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