SEC aims for T+1 settlement by March 2024

As part of its review of market structure, the US Securities and Exchange Commission (the “SEC”) has proposed rules 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”). If the amendments are adopted, T+1 would become the standard settlement cycle in the United States beginning on March 31, 2024. 

In a key difference from the previous move from T+3 to T+2 settlement, the proposed changes would remove the exemption allowing most firm commitment underwritten securities offerings that price after 4:30 pm ET to use a T+3 or T+4 settlement cycle without express agreement. However, the proposal would continue to allow parties to affirmatively agree on a longer settlement cycle at the time of the transaction.

Current T+2 settlement cycle

Currently, Rule 15c6-1(a) under the US Securities Exchange Act of 1934 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 US Securities Act of 1933 (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)); 
• T+2 settlement does not apply to contracts for the purchase and sale of limited partnership interests that are not listed on an exchange or for which quotations are not disseminated through an automated quotation system of a registered securities association (Rule 15c6-1(b)(1)); and
• The SEC may exempt contracts for the purchase and sale of securities exempt by order from time to time (Rule 15c6-1(b)(2)). 

Proposed T+1 settlement cycle

The proposed amendments would make the following changes: 

• Shorten the settlement cycle from T+2 to T+1 – The proposal would only change the standard settlement date in Rule 15c6-1(a), and keep the existing exclusions in the rule. It would also retain the override provision, although the proposing  release emphasizes that the provision was intended to apply only to “unusual transactions,” such as seller’s option trades that typically settle as many as sixty days after execution as specified by the parties to the trade at execution. In practice the override has been widely used in a variety of transactions both usual and unusual.
• Remove the exemption allowing T+4 settlement – The SEC considered retaining the Rule 15c6-1(c) exemption for SEC-registered firm commitment registered offerings but with T+2 settlement instead of T+4 settlement. In the proposal, however, it opted to propose deleting the Rule 15c6-1(c)  exemption in its entirety. Current market practice for substantially all SEC-registered equity offerings is T+2 settlement. Further, the exemption was adopted in 1995, in response to comments stating that new issue securities could not settle on T+3 because prospectuses could not be printed prior to the trade date. The proposing release argues that the change in Securities Act Rule 172 to an “access equals delivery” model for final prospectus delivery means that broker-dealers generally no longer need extra time to print and deliver the prospectus. 
• Keep the Rule 15c6-1(d) exemption substantially the same – The proposal would only remove the reference in the provision to 15c6-1(c) in the Rule 15c6-1(d) exemption that allows parties to agree to an alternate settlement date. Otherwise the provision would continue to provide underwriters and the transaction parties with the ability to agree, in advance of a particular transaction, to a settlement cycle other than the standard set forth in Rule 15c6-1(a) when needed to manage obligations associated with the firm commitment offering.

In the SEC’s view, deleting Rule 15c6-1(c) while retaining Rule 15c6-1(d) provides sufficient flexibility for market participants to manage the potential need for longer than T+1 settlement because Rule 15c6-1(d) would continue to permit the underwriters and the parties to a transaction to agree, in advance of entering the transaction, on a different settlement cycle. The SEC also believes that requiring the underwriters and the transaction parties to agree before entering the transaction whether to deviate from the standard settlement cycle would promote transparency among the parties.

Other proposed changes 

The proposal would also require affirmations, confirmations, and allocations to take place as soon as technologically practicable on the trade date (i.e., T+0) and require clearing agencies that provide central matching services to have policies and procedures to facilitate straight-through processing (i.e., fully automated transactions processing). 

The proposing release notes that the amendments may affect compliance with other existing SEC rules and guidance that refer to the settlement cycle or settlement processes. The SEC is taking the preliminary position that no changes to these rules are necessary to adopt the proposed rules. 

Request for comment

The proposing release poses 143 questions, as well as additional sub-questions, for public comment. The SEC is particularly interested in receiving public comment on potentially achieving T+0 settlement in the future. 

One key area for market participants engaging in international securities offerings is the potential mismatch between settlement timeframes in different markets. For example, most major securities markets in non-US jurisdictions currently settle transactions on a T+2 basis. When the SEC moved to T+2 in 2017, several major securities markets had already adopted a T+2 settlement cycle, and the US move to T+2 harmonized much of the prevailing settlement cycles. The proposing release asks whether shortening the standard settlement cycle even further to T+0 in the US securities markets will result in decreased harmonization of settlement cycles generally. 

Comments are due 30 days after the proposal is published in the Federal Register, or April 11, 2022 (60 days after the SEC published the proposal), whichever is later.

We will continue to monitor developments in this area and welcome any queries you may have.