T+1 settlement of securities required by May 2024
T+2 settlement permitted for certain firm commitment underwritten offerings
As part of its review of market structure, the U.S. Securities and Exchange Commission (the “SEC”) has adopted amendments to its rules to shorten the standard securities settlement cycle (i) 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”); and (ii) for firm commitment offerings registered under the U.S. Securities Act of 1933 (the “Securities Act”) priced after 4:30 pm Eastern Time (“ET”), from four business days after the trade date (“T+4”) to T+2.
Market participants must begin complying with the new requirements by May 28, 2024.
Current T+2 settlement cycle
Currently, Rule 15c6-1(a) under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”) prohibits brokers or dealers from entering into a contract for the purchase or sale of a security that provides for payment of funds and delivery of securities later than the second business day after the date of the contract, subject to an “override provision” that allows the parties to the trade to agree that settlement will take place later than T+2, provided that the agreement is express and reached at the time of the transaction.
The T+2 requirement does not apply to exempted securities, government securities, municipal securities, commercial paper, bankers’ acceptances or commercial bills. Rule 15c6-1 also contains the following exemptions:
- Firm commitment underwritten offerings registered under the Securities Act and priced after 4:30 pm ET may settle no later than T+4 unless otherwise expressly agreed to by the parties (Rule 15c6-1(c)).
- Parties to a contract are deemed to have expressly agreed to an alternate settlement date at the time of the transaction for a contract for the sale for cash of securities pursuant to a firm commitment offering if the managing underwriter and the issuer have agreed to the settlement date for all securities sold pursuant to such offering, and the parties to the contract have not expressly agreed to another settlement date at the time of the transaction (Rule 15c6-1(d)).
- The SEC may exempt contracts for the purchase and sale of securities by order from time to time (Rule 15c6-1(b)(2)). In 1995, the SEC granted an exemption under this rule for certain foreign securities (i.e., securities that do not have facilities for transfer or delivery in the United States and securities that do have U.S. transfer or delivery facilities but less than 10% of the annual trading volume occurs in the United States). However, if there are no U.S. transfer facilities for a foreign security but there are U.S. transfer facilities for an American Depositary Receipt (“ADR”) based on the foreign security, only the foreign security will be exempt from Rule 15c6-1.
New T+1 settlement cycle
Under the new settlement rules adopted by the SEC:
- Settlement cycle shortened from T+2 to T+1 – The amendments will shorten the standard settlement date in Rule 15c6-1(a) to T+1 and add security-based swap transactions as another exemption. In its comment letter, the Securities Industry and Financial Markets Association (“SIFMA”) raised concerns that under the new rule, ADRs must settle on T+1 while the underlying foreign shares settle on T+2 (as is typical in most major non-U.S. securities markets such as the UK and the European Union). This will mean that market participants will not be able to purchase foreign shares and sell related ADRs in the United States on the same trading day and timely settle the sale of the ADRs using the newly created ADRs. The SEC, however, determined that ADRs should continue to be subject to Rule 15c6-1(a). The SEC also declined to create an exemption from T+1 settlement for U.S.-listed exchange-traded funds with baskets that contain foreign securities and ADRs.
- T+2 permitted for SEC-registered firm commitment offerings – The SEC had proposed deleting the Rule 15c6-1(c) exemption for firm commitment registered offerings in its entirety, but the final amendments retain the Rule 15c6-1(c) exemption but with T+2 settlement instead of T+4 settlement. Amended Rule 15c6-1(c) will provide that the new T+2 settlement requirement does not apply to contracts for the sale for cash of securities that are priced after 4:30 p.m. ET on the date the securities are priced and that are sold by an issuer to an underwriter pursuant to a firm commitment underwritten offering registered under the Securities Act, or sold to an initial purchaser by a broker-dealer participating in such offering. However, a broker or dealer may not effect or enter into a contract for the purchase or sale of such securities that provides for payment of funds and delivery of securities later than T+2, unless otherwise expressly agreed to by the parties at the time of the transaction.
- Override provision retained – The SEC has retained the override provision, which allows parties to a trade to agree that the settlement date may be later than T+1, provided that the agreement is express and reached at the time of the transaction. This is key for many offerings of debt securities and other securities offerings requiring later settlement.
In addition to shortening the standard settlement cycle, the final rules require broker-dealers either to enter into written agreements or to establish, maintain, and enforce written policies and procedures reasonably designed to ensure the completion of allocations, confirmations, and affirmations as soon as technologically practicable and no later than the end of the relevant trade date. Registered investment advisers will also be required to make and keep records of the allocations, confirmations, and affirmations for certain securities transactions. Finally, the SEC is also adding a new requirement to facilitate straight-through processing, which applies to certain types of clearing agencies that provide central matching services.
Impact on other rules
In its proposing release, the SEC asked for comment as to how shortening the T+1 settlement cycle could affect other SEC rules and guidance, as well as self-regulatory organization (“SRO”) rules. While the SEC acknowledged some areas that could require further rulemaking, it generally declined to adopt further amendments to the following rules:
- Exchange Act Rule 10b-10 – Although Rule 10b-10 does not directly refer to the settlement cycle, it requires that a broker-dealer send a customer a written confirmation disclosing specified information “at or before completion” of the transaction. The SEC declined to amend Rule 10b-10, however, because while the rule requires a broker-dealer to “give or send” the confirmation prior to settlement, it does not require that the Rule 10b-10 confirmation be received prior to settlement. In the SEC’s view, shortening the settlement cycle does not affect the ability of the broker-dealer to give or send 10b-10 confirmations. Broker-dealers and their customers also have the option to establish an arrangement for electronic delivery. The SEC declined to provide guidance allowing electronic delivery of prospectuses and other documentation without affirmative opt-in by the investor.
- Exchange Act Rule 15c2-8(b) – Under Rule 15c2-8(b), where the issuer has not been previously required to file reports under Exchange Act Section 13(a) or 15(d), a broker-dealer is required to deliver a copy of the preliminary prospectus to any person who is expected to receive a confirmation of sale at least 48 hours prior to the sending of such confirmation. SIFMA noted that in a T+1 settlement cycle, many broker-dealers will send confirmations on the trade date to achieve settlement by T+1, and that Rule 15c2-8 does not reflect present-day offering procedure timelines, public availability of preliminary prospectuses on EDGAR, or electronic delivery facilities. The SEC declined to amend Rule 15c2-8, however, noting that firm commitment offerings priced after 4:30 p.m. ET will be subject to a T+2 settlement requirement.
- Regulation SHO – Commenters argued that the SEC should consider revising certain timeframes and deadlines under Regulation SHO that could be affected by the move to T+1 settlement. The SEC disagreed that it was necessary to do so at this time but will continue to monitor the impact of T+1 settlement on Regulation SHO requirements.
- Broker-dealer financial responsibility rules – The SEC chose not to revise rules such as Exchange Act Rule 15c3-3, but the SEC staff will continue to monitor the impact of T+1 settlement on broker-dealer financial responsibility rules under the Exchange Act that explicitly or implicitly refer to the settlement date of a securities transaction.
- SRO rules – While noting that T+1 settlement will require changes to rules governing SROs such as the Financial Industry Regulatory Authority, the National Securities Clearing Corporation and the Depositary Trust Company, the SEC is not currently providing any further guidance to industry participants.
We will continue to monitor developments in this area and welcome any queries you may have.