The Securities and Exchange Commission has amended Rule 15c6-1 under the Securities Exchange Act of 1934 in order to shorten the standard settlement cycle for most broker-dealer securities transactions from three business days after the trade date to two business days after the trade date. The SEC indicates that it expects shortening the standard securities settlement cycle to enhance efficiency and reduce the risks that arise from the value and number of unsettled securities transactions prior to the completion of settlement, including credit, market and liquidity risk that market participants face, which in turn could reduce systemic risk in the U.S. securities markets. Currently, the standard settlement cycle for most broker-dealer securities transactions is three business days, known as T+3. The amendment to the rule shortens the settlement cycle to two business days, or T+2.
The newly adopted amendment prohibits a broker-dealer from entering into a contract for the purchase or sale of a security 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 the transaction.
The SEC originally adopted Exchange Act Rule 15c6-1 in 1993 to establish a standard settlement cycle for most broker-dealer securities transactions (subject to the exceptions provided in the rule ˗ which remain unchanged ˗ such as for contracts related to exempted securities, government securities, municipal securities, commercial paper, bankers’ acceptances or commercial bills), effectively shortening the settlement cycle for such securities transactions from the then-prevailing five-business-day period to three business days after the trade date (T+3). At the time it adopted the rule in 1993, the SEC cited a number of reasons for standardizing and shortening the settlement cycle, which included reducing credit and market risk exposure related to unsettled trades, reducing liquidity risk among derivatives and cash markets, encouraging greater efficiency in the clearance and settlement process, and reducing systemic risk for the U.S. markets. The SEC believes that shortening the standard settlement cycle to T+2 will result in a further reduction of credit, market and liquidity risk and, as a result, a reduction in systemic risk for U.S. market participants.
In 2016, the SEC proposed amending Rule 15c6-1 in order to shorten the standard settlement cycle from T+3 to T+2. At that time, it noted that, since it adopted Rule 15c6-1 in 1993, not only have the financial markets expanded and evolved significantly, but also the 2008 financial crisis had taken place. Shortening the standard settlement cycle is also consistent with the broader focus by the SEC – in part resulting from the financial crisis – on enhancing the resilience and efficiency of the national clearance and settlement system and the role that certain systemically important financial market utilities, particularly central counterparties (so-called FMUs and CCPs), play in concentrating and managing risk. The SEC also noted the significant technological developments in the industry since it first mandated T+3 settlement in 1993, which it believed would help to facilitate shortening of the settlement cycle.
The amendment to Rule 15c6-1, as adopted, prohibits a broker or dealer from entering into a securities contract that settles later than the second business day after the date of the contract unless expressly agreed upon by both parties at the time of the transaction, subject, as in the current version of the rule, to certain exceptions. The amended rule does not affect the current ability in most firm commitment underwritten transactions to use a T+3 or, if priced after 4:30 p.m. U.S. Eastern time, a T+4 settlement cycle; nor does it affect the ability of the parties to any particular transaction to agree expressly to a settlement cycle that is longer than T+2.
The SEC has established September 5, 2017 as the compliance date for the changes to Rule 15c6-1. The SEC stated that it believes this compliance date provides sufficient time for broker-dealers, clearing agencies, self-regulatory organizations and other market participants, including retail investors, to plan for, implement and promulgate new rules and test changes to systems, operations, policies and procedures in order to move to a standard T+2 settlement cycle.