SEC Proposes Shortening Broker-Dealer Settlement Cycle to T 2

By Jack Bowling and Diana Rosia

On September 28, 2016, the U.S. Securities and Exchange Commission (SEC) submitted a proposal to shorten the settlement cycle for broker-dealer transactions to two days after the trade date (T+2). The proposal would amend Rule 15c6-1(a) of the Securities Exchange Act of 1934, which currently imposes a settlement cycle of three days after the trade date (T+3) on most broker-dealer transactions. The SEC's proposal is partly in response to a push by the Depository Trust and Clearing Corporation and other members of the financial industry to mitigate market risk by shortening the settlement cycle.

According to the SEC, longer settlement cycles result in a higher value and volume of unsettled accounts, exposing the market and market participants to greater risk. By proposing to shorten the settlement cycle to T+2, the SEC seeks to reduce systemic risk by reducing credit, market and liquidity risk and improving transaction and market efficiencies. In addition, a T+2 settlement cycle would allow the U.S. market to mirror the shorter settlement cycles used in many non-U.S. markets.

While the proposal applies to all securities, unless exempted, existing exemptions limit the proposed rule's impact. As proposed, Rule 15c6-1(a) continues to exempt the following securities: exempted securities, government and municipal securities, commercial paper and bills, and bankers' acceptances. Rule 15c6-1 also exempts a number of transactions and contracts, including: transactions involving limited partnership interests not listed on an exchange; securities that do not generally trade in the U.S.; and securities sold by issuers to underwriters or broker-dealers after 4:30 p.m. ET on the date that the securities are priced. This last exemption limits the application of the proposed rule to securities sold on the secondary market. In addition, the proposal would allow for the continued practice of parties agreeing to a settlement cycle greater than T+2. In light of the exemptions, the SEC is asking for comment on whether to amend the exemptions included in the rule.

There will be a 60 day public comment period. In addition to general comments, the SEC is requesting comments regarding the proposal's economic effects, shortening the settlement cycle to T+1, and the T+2 settlement cycle's impact on other regulations. The SEC is proposing a September 5, 2017 compliance date.

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