SEC issues risk alert on T+1 transaction settlement cycle

Move aims to help broker-dealers preparing for a shortened standard settlement cycle.

The SEC’s Division of Examinations has published a Risk Alert regarding the shortening of the securities transaction settlement cycle. The aim is to provide registrants with additional information about the scope and content of examinations in this area. 

The final rule amendments on the shortened settlement cycle – enacted in February – will shorten that timetable for most broker-dealer securities transactions from two business days after the trade date (T+2) to one business day (T+1). The SEC believes that shortening the settlement cycle to T+1 will reduce market participants’ exposure to credit, market and liquidity risk arising from unsettled transactions.

T+1 compliance

Broker-dealers will be required to comply with the amended rules on May 28, 2024. This is also the compliance date for new rules related to the processing of institutional trades by broker-dealers and certain clearing agencies, as well as certain recordkeeping amendments applicable to registered investment advisers. 

In its alert, the SEC says it is critical that registrants and other market participants prepare for the shortened settlement cycle and understand the impacts of T+1 and the final rules to identify necessary changes and critical dependencies to manage this transition. 

The Securities Industry and Financial Markets Association (SIFMA), an advocacy group for the securities industry, offers a  T+1 Securities Settlement Industry Implementation Playbook, which outlines a detailed approach to identifying the potential impacts, implementation activities, implementation timelines, dependencies, and risk impacts that market participants should consider in order to prepare for the impending transition to a T+1 Settlement Cycle.

Resources from the SEC and FINRA can also help businesses identify the areas affected by shortening the settlement cycle and the various considerations that should go into their plans to comply with these fast-approaching rules.

Shortening the settlement period

Shortening the standard settlement cycle will affect market participants, such as broker-dealers, clearing agencies, and registered investment advisers by requiring changes to their business practices, computer systems, and technology solutions.

The alert reminds businesses of a few of these scenarios:

  • Shortening the standard settlement cycle to T+1 reduces the time frames to effect the closeout of most types of fail-to-deliver positions under Rule 204 of Regulation SHO.
  • It shortens the timeframe for broker-dealers to comply with the requirements under Exchange Act Rule 10b-10 to give or send a written confirmation at or before completion of the transaction.
  • It reduces the number of days that broker-dealers will have to obtain possession of customer securities before being required to close out a customer transaction under Exchange Act Rule 15c3-3(m).

Among other things, the Examinations staff may review whether and how registrants have evaluated the potential impact of the final rules on their: (i) business activities; (ii) operations and risk assessments; (iii) services; and (iv) customers, clients, and/or other relevant parties.

Related news

This isn’t the first time such a change has occurred; in 2017, the SEC shortened the settlement cycle from T+3 to T+2. The move to T+1 reflects improvements in technology that allow trades to settle more quickly.

Interestingly, Canada will transition to T+1 the day before on May 27, 2024.