Proposed rule to shorten settlement period from T+3 to T+2
On September 28, 2016, the U.S. Securities and Exchange
Commission (SEC) proposed an amendment to shorten the standard
settlement cycle for broker-dealer securities transactions from T+3
to T+2. The proposal is part of the SEC’s ongoing effort to
reduce systemic risk to the U.S. financial system by reducing the
credit, market, and liquidity risks that market participants face
during settlement periods. More specifically, the proposed
amendment is consistent with the SEC’s efforts to promote
clearing and settlement efficiency and to enhance the resilience of
important financial market utilities and central counterparties,
policy goals that formed the basis of the 2010 Clearing Supervision
The proposed amendment would impact Rule 15c6-1(a) of the
Exchange Act. The SEC is seeking comments for 60 days following the
publication of the proposal in the Federal Register. The SEC is
considering a compliance date of September 5, 2017.
Effects of the proposed amendment on market participants
The proposed amendment would prohibit a broker-dealer from
effecting or entering into a contract for the purchase or sale of a
security that provides for payment or delivery of the security more
than two business days after the date of the contract—unless
the parties explicitly agree to a longer settlement period at the
time of the transaction.
The rule may also affect market participants’ obligations
Regulation SHO: The proposed
amendment would reduce the time frames for closeout under Rule 204
from T+4 to T+3 and may affect whether a seller is deemed to own a
security for purposes of marking it long under Rule 200(c).
financial responsibility rules under
Exchange Act Rules 15c3-3 and 17a-5: The proposed rule may shorten
the period during which broker-dealers must comply with SEC rules
on financial responsibility, including transmitting funds an
Exchange Act Rule 10b-10: The
proposed amendment may shorten the period during which customers of
broker-dealers must send confirmation of their transaction.
The SEC is soliciting comments on each of these potential
The following contracts are exempt from the rule:
securities that do not generally
trade in the United States
securities issued or sold by an
insurance company and funded by, or participating in, a
certain other exempt securities
Furthermore, the SEC notes that many of the securities subject
to the amendment (e.g., options and certain mutual funds) already
settle in a period shorter than three business days. In trades of
securities that are-legally and practically-affected by the new
rule, the SEC predicts that a shortened settlement period will
result in significant cost savings for central counterparties and
clearinghouses due to decreased demands on their liquidity.
Financial policy goals
The proposed amendment limiting securities trading to a T+2
settlement cycle serves several overlapping policy goals:
harmonize regulation with foreign
financial markets, including the EU, which operates on a T+2 cycle,
and China, which operates on a T+1 cycle; additionally, Canada is
likely to transition to a T+2 cycle when the United States
reduce costs of clearing and
settlement for U.S. market participants
take advantage of technological
advancements to increase speed, safety, and efficiency of clearing
reduce systemic risk in the U.S.
Tandy language no longer required
Companies responding to SEC comment letters on their SEC filing
reviews no longer need to include affirmative representations that
they will not raise the SEC review process and acceleration of
effectiveness as a defense in any legal proceeding.
The SEC announced the change on October 5, 2016, explaining that
it has required such affirmative disclosures, known as
“Tandy” language, since the mid-1970s. Practitioners
note that the change is a move toward efficiencies, shifting the
burden of stating Tandy language from individual companies to the
SEC staff. The SEC noted in its press release that companies are
still responsible for the accuracy and adequacy of the disclosure
in their filings, and they will include reminder language to such
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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