The SEC Announces Proposals To Reduce Settlement Risk to T+1

Traders face a variety of risks related to clearance and settlement. Now, the SEC might be making changes that can reduce the risks during this process. In February, the SEC announced that it is proposing new amendments and rules to protect investors. The goal of these changes is to reduce the risks faced by investors during security clearance and settlement.

The goal of these proposed rule changes is to increase operational efficiency. These changes would shorten the amount of time between the execution of securities transactions and the final settlement.

What Do The Changes Propose?

Traditionally, the standard settlement cycle takes approximately two days after the trade date, usually referred to as T + 2. The proposed rule change would shorten the settlement cycle for the vast majority of transactions involving brokers and dealers to T + 1.

Of note, this is not the first time that the SEC has made proposals to shorten the settlement cycle. Before 1993, the standard settlement cycle was five days after the initial transaction. In 1993, the SEC made a rule change that shortened this from five days to three days, or from T + 5 to T + 3.

In 2017, the SEC made another change, shortening the cycle further from T + 3 to T + 2. These changes have been made as technology has gotten better, making it easier for people to conduct transactions as quickly as possible. In an effort to make it easier for everyone who completes transactions with regularity, the SEC is trying to shorten the settlement cycle once again.

Other Changes to the Proposed Rules

There are a number of other changes that could be made if the proposed rule goes through. A few examples include:

  • New regulatory compliance rules related to the T + 1 proposed standard settlement cycle
  • Adding new requirements for processing trades completed by certain clearing agencies, investment advisors, and broker-dealers to make sure the T + 1 settlement cycle precedes fairly
  • Getting rid of the separate settlement cycle of T + 4 for firm commitment offerings priced after 4:30 p.m., which is when the market typically closes
  • Add new processes to facilitate straight-through processing with new requirements that are applicable to clearing agencies that fall under the category of central matching service providers, or CMSPs

Anyone who is interested can take a look at other details related to the rules and amendments on the SEC’s website.

The SEC Is Looking for Feedback From the Public

The goal of this rule is to reduce the risk that investors face with a settlement cycle by shortening the cycle from 2 business days to 1 business day. The SEC is curious about what people believe will be the impact of this change. Right now, they are looking for feedback from the general public. The comment section is to remain open for 30 days after the initial publication on the Federal Register before the SEC makes a final decision.

At Colonial Stock Transfer, we offer services that comply with T+2 rules, and we will be ready for T+1 if it gets approved. Our transactions are generally processed at a T+1 speed already, so you can benefit from our transfer agent services. Contact us today to learn more!

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