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The Sec Shortens The Settlement Cycle To T+2

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  • Posted on: Mar 29 2017

As many investors know, the securities industry settles securities transactions (e.g., the purchase and sale of equities, as well as corporate and municipal bonds) on the third day after a transaction is executed by sending payment for the transaction to the seller and the securities to the buyer. This settlement cycle is known as “T+3” – shorthand for “trade date plus three days.”

Prior to 1995, the financial markets operated on a longer settlement cycle – “T+5”. In 1995, however, the Securities and Exchange Commission (“SEC”) reduced the settlement cycle from five business days to three business days, or “T+3”. This move lessened the amount of money needed to be collected at any one time, reduced risk (e.g., credit, market, and liquidity risk) and strengthened the financial markets for times of stress.

In early 2012, the Depository Trust & Clearing Corporation (“DTCC”) commissioned an independent study to analyze the costs, benefits, opportunities, and challenges associated with reducing the settlement cycle to T+1 or T+2 from T+3. This study confirmed the risk reduction benefits, operational efficiencies, and feasibility of reducing the settlement cycle to T+2 for equities, corporate bonds, municipal bonds, and unit investment trusts.

Following the 2012 study, the industry, led by various associations, including the Securities Industry and Financial Markets Association (“SIFMA”) and the Investment Company Institute (“ICI”), expressed support for the migration to a T+2 settlement cycle.

In 2014, DTCC, in collaboration with representatives from the financial services industry, including SIFMA and the ICI, established an Industry Steering Committee (“ISC”) comprised of a broad range of firms and trade associations. The ISC was tasked with directing the scope, requirements, and changes needed to facilitate the implementation of the T+2 settlement cycle.

In June 2015, the ISC released a white paper outlining the timeline and industry-level actions required to move to a two-day settlement cycle by the end of the third quarter of 2017.

Notably, the industry found strong support from the SEC, which adopted changes to Rule 15c6-1 on March 22, 2017, to facilitate the move to a T+2 settlement cycle. The changes do not, however, affect any other portions of the rule, including the existing exemptions for government securities, municipal securities and certain other securities and provisions allowing issuers and their underwriters to agree on a different settlement cycle for securities being sold for cash in firm commitment underwritten public offerings.

The changes will align the U.S. with other T+2 settlement markets across the globe.

“As technology improves, new products emerge, and trading volumes grow, it is increasingly obvious that the outdated T+3 settlement cycle is no longer serving the best interests of the American people,” said SEC Acting Chairman Michael Piwowar.  “The SEC remains committed to ensuring that U.S. securities regulation is reflective of modern times, and in shortening the settlement cycle by one day we aim to increase efficiency and reduce risk for market participants.”

Broker-dealers are required to comply with the amended rule by September 5, 2017.


Shortening the settlement cycle to T+2 is expected to enhance market efficiency, improve operational process, reduce credit and counterparty risk, improve cash deployment, increase market liquidity, lower collateral requirements, and enhanced global settlement operations. If these expected benefits are realized, the shortened settlement cycle will promote financial stability, improve capital efficiency, and reduce the costs incurred by the industry and investors.

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