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SEC Shortening Trade Settlement Cycle from T+2 to T+1

By: William R. James
April 1, 2022
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The SEC recently announced that trade settlement will be reduced from T+2 to T+1. Read more about the reason behind this reduction, when it will take effect, and what it will mean to member firms going forward.

What is the Settlement Cycle?

When selling or purchasing securities there is a cutoff date when the securities traded must be delivered by the selling side and paid for by the purchasing side. That date for most corporate securities is fixed under a set of rules called the Uniform Practice Code. Regulators and the various stock exchanges all agree to operate under this code. The most common settlement arrangement is called regular way and it currently calls for settlement on the second business day from the trade date; what is commonly known as T+2.

When is the Settlement Cycle being Shortened from T+2 to T+1?

In February 2022, the Commission moved to accelerate the settlement cycle from T+2 to T+1. The SEC has stated that the change will take effect in the first half of 2024.

With the passage of the Securities Acts Amendments of 1975, Congress empowered the SEC with the authority to change the trade settlement cycle. Eighteen years later, in 1993, the Commission used that authority to again shorten the settlement cycle from T+5 business days to T+3. The SEC then shortened from T+3 to T+2 on the first full day of spring, 2017. The upcoming change in 2024 will be the first alteration of the settlement cycle since then.

Why is the Settlement Cycle being Shortened from T+2 to T+1?

What the shortening means practically for settlement is that confirmations, allocations, and trade affirmations will effectively move to T+0 in order for settlement to occur on time. Although member firms will be challenged during the transition period to adopt technology and software to realize optimal settlements, the overall benefit is to reduce risk, and strengthen and modernize securities settlement in the U.S. financial markets

Benefits of the Settlement Cycle being Shortened from T+2 to T+1

The benefits of the shortened settlement cycle include lower risk, lower costs associated with the margin needed to post with clearinghouses, and quicker access to funds.

The pandemic year of 2021 intensified the strain of volatility and trading volume, coupled with the enormous number of transactions in “meme” stocks. With that volume came higher margin requirements on retail brokerage, leading to restricted trading in those stocks, leaving some investors unable to purchase stocks at a critical time.

The Commission is confident that shortening the settlement cycle—from T+2 to T+1, plus the corresponding move to accelerate settlement to T+0—as technology allows will further
enhance our trading markets.

Concerns about the Settlement Cycle being Shortened from T+2 to T+1

Apart from the more widely understood future need to deliver securities and funds one day earlier, there are other concerns to the shortened cycle, which includes:

  • Fails-to-deliver
  • Fails-to-receive
  • the process of reclamation
  • Regulation SHO
  • Buy-ins
  • sell-outs and 
  • other settlement methods such as DVP/RVP.
These are just some of the issues that are affected by the change and appear on certain qualification exams.

How Member Firms Must Respond to the Shortened Settlement Cycle

Thankfully, the Commission will not require firms to adopt T+1 until sometime in the first half of
2024, giving member firms and FINRA’s qualifications department time to adjust accordingly, as there’s much to consider and put into practice.Member firms will need to increase their budget for operational and technology costs while anticipating reduced revenue from securities lending.

Because settlement weaves itself throughout industry practices and processes, we at Kaplan will be looking at the hundreds of ways shortened settlement will impact Licensing Exam Manuals and practice test questions through our many study programs. The day T+1 goes into effect, we will be ready, and our students may look forward to being fully equipped with the latest, most up-to-date materials.