Last March, the SEC amended Rule 15c6-1(a) under the Securities Exchange Act of 1934 to shorten the standard securities transaction cycle for most securities transactions from T+3 to T+2. Under the amendment, “T” refers to the day of the transaction and the parties have two days thereafter to complete the transaction by delivery of the security and for payment. The amendment, effective September 5, 2017, replaces the prior T+3 rule.
The SEC explained the change to T+2 [in plain English!] as follows:
“Generally, this change would mean that when an investor buys a security, the brokerage firm must receive payment from the investor no later than two business days after the trade is executed. When an investor sells a security, the investor must deliver to the brokerage firm the investor’s security no later than two business days after the sale. For example, if an investor sells shares of a particular stock on Monday, the transaction would settle on Wednesday.”
The T+2 rule will apply to the same securities transactions currently subject to theT+3 rule — transactions for stocks, corporate bonds, exchange-traded funds, certain mutual funds, and limited partnerships that trade on an exchange.
The SEC rule’s T+2 settlement cycle rule does not apply to government securities, commercial paper, bankers’ acceptances, commercial bills, or municipal securities. However, after the SEC adopted the T+2 rule, The Municipal Securities Rulemaking Board (MSRB) also adopted the T+2 rule change to sale and purchase of municipal securities. Parties to a specific transaction can also agree to a longer settlement cycle at the time of the transaction.
The SEC’s new rule does not apply to the following:
- Transactions in limited partnership interests that are not listed on an exchange or that are not quoted on an automated system of a registered securities association
- Securities that the SEC specially exempts from the T+2 rule
- Rule 15c6-1(c) provides special treatment for public offerings priced after 4:30 p.m. Eastern Time. Such offerings must be closed before the fourth business day unless all parties agree otherwise.
The SEC’s move toward the T+2 settlement cycle is supported by studies from major players in the securities industry — Depositary Trust and Clearing Corporation (DTCC), the Investment Company Institute (ICI), and the Securities Industry and Financial Managers Association (SIFMA). The Commission noted in its proposing release for the T+2 settlement rule that foreign securities regulators had taken steps to shorten the transaction cycle. Israel, Chile, and Saudi Arabia have a settlement cycle of T+0, China uses T+1, and the EU countries use T+2.
What’s next — T+1?
Barring unforeseen difficulties with the T+2 settlement cycle, it is likely that the SEC and FINRA will move toward a T+1 settlement cycle. Kara Stein, the only remaining post-election SEC Commissioner other than acting Chair Piwowar, said she’s asked the staff to study the effects of moving to T+2 over the next three years and consider whether further changes are needed. “While movement to a T+2 standard settlement cycle is an improvement from the current T+3 standard, more can and should be done,” Stein said. “At this very moment, technological, operational and communications improvements exist that could enable T+1 and end-of-the-day settlement cycles.
Stay tuned for more FIRE regulatory reminders…