SEC Proposes Faster Trade Settlement Times
The Securities and Exchange Commission voted on Wednesday to propose rule changes to reduce risks in the clearance and settlement of securities, including by shortening the standard settlement cycle for most broker-dealer transactions in securities from two business days after the trade date (T+2) to one business day after the trade date (T+1). The proposed changes are designed to reduce the credit, market, and liquidity risks in securities transactions faced by market participants and U.S. investors.
According to SEC Chair Gensler, the primary goals of the proposal are to reduce risk to the financial system and improve efficiencies in the market by shortening the standard settlement cycle, requiring affirmations, confirmations, and allocations to take place as soon as technologically practicable on trade date, and requiring clearing agencies that provide central matching services to have policies and procedures to facilitate straight-through processing.
In addition to shortening the standard settlement cycle, the proposal includes rules directed at broker-dealers and registered investment advisers to shorten the process of confirming and affirming the trade information necessary to prepare a transaction for settlement so that it can be completed by the end of the trade date. Further, the proposal includes a new requirement to facilitate straight-through processing, which would apply to certain types of clearing agencies that provide central matching services. Central matching service providers help facilitate the processing of institutional trades between broker-dealers and their institutional customers. The proposed rule would require new policies and procedures directed to straight-through processing and require an annual report on progress with the process.
The proposal comes roughly a year after Robinhood temporarily suspended trading in meme stocks to ensure it could meet deposit requirements.
Robinhood temporarily suspended trading in stocks like GameStop Corp. (GME) and AMC Entertainment Holdings Inc. (AMC) at the height of the meme stock frenzy last January. The brokerage did this to ensure it met deposit requirements after retail investors piled into these institutionally-held stocks, seeking to force a short squeeze rally.
A T+1 settlement cycle would help market participants gain a better understanding of where the money and shares were coming from to meet clearing obligations if a similar scenario were to happen again.
The public comment period will remain open for 60 days following publication of the proposing release on the SEC’s website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 200 E. Palmetto Park Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, by email [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.