On September 28, 2016, the SEC issued a proposed rule amendment to shorten the standard settlement cycle for most broker-dealer securities transactions from three business days after the trade date (T+3) to two business days after the trade date (T+2), subject to certain exceptions. The proposal is designed to improve the capital and operational efficiency of the clearance and settlement process and reduce credit, market, liquidity and systemic risk exposure related to unsettled trades. In addition, shortening the U.S. settlement cycle to T+2 addresses the timing mismatch between the U.S. and certain non-U.S. securities markets that have already shifted to a T+2 settlement cycle.
As proposed, the amendment would prohibit a broker-dealer from entering into a contract for the purchase or sale of a security (other than an exempted security, government security, municipal security, commercial paper, bankers’ acceptances or commercial bills) that provides for payment of funds and delivery of securities later than two business days after the trade date, unless otherwise expressly agreed to by the parties at the time of transaction. The Investment Company Institute’s Board of Governors previously endorsed an industry initiative led by the Depository Trust & Clearing Corporation and other market participants to shorten the settlement cycle to T+2, noting that it would, among other things, further harmonize the settlement time frames between portfolio securities and fund shares, thereby reducing settlement timing challenges for fund managers. Section 22(e) of the 1940 Act requires a mutual fund to pay redemption proceeds within seven days upon the tender of shares for redemption. However, mutual fund trades generally settle one day after the trade date (i.e., T+1).
Comments on the proposed rule amendment are due on or before December 5, 2016. The SEC’s proposing release is available at: https://www.sec.gov/rules/proposed/2016/34-78962.pdf.