On February 15, the Securities and Exchange Commission (SEC) adopted rule changes to shorten the standard settlement cycle for most broker-dealer transactions from two business days after the trade date (T+2) to one business day after the trade date (T+1). The revised rules also shorten the standard settlement cycle for firm commitment offerings priced after 4:30pm Eastern Time from four business days after the trade date to T+2.
In addition, the revised rules include various other changes relating to security-based swaps, allocations, confirmations and affirmations, and clearing agency requirements to facilitate straight-through processing (STP). More specifically:
Exemption for Security-Based Swaps. The revised rules exempt security-based swaps from the shortened settlement cycle requirements. Other types of securities transactions will remain exempt from the settlement cycle requirements, including (among others) transactions in exempted securities, government securities, municipal securities, commercial paper, bankers' acceptances, commercial bills, and certain contracts for the purchase or sale of limited partnership interests.
Allocation, Confirmation and Affirmation Process. The SEC also adopted new requirements for broker-dealers involved in the allocation, confirmation and affirmation process. More specifically, the revised rules require a broker-dealer engaging in the allocation, confirmation, or affirmation process in securities subject to the T+1 settlement cycle to either enter into a written agreement or adopt written policies and procedures to ensure that allocation, confirmation and affirmation are completed as soon as technologically practicable and no later than the end of the trade date.
Relatedly, the revised rules require registered investment advisers to maintain records of allocations, confirmation and affirmations for securities subject to the T+1 settlement cycle.
Clearing Agency Requirements. The revised rules require clearing agencies that provide a central matching service to adopt policies and procedures reasonably designed to facilitate STP and to file an annual report addressing the clearing agency's progress in facilitating STP.
The compliance date for the rule changes is May 28, 2024 with one notable exception: security-based swaps will be exempt from the settlement cycle requirements on the effective date of the rule changes (i.e., 60 days after publication of the rules in the Federal Register).
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