SEC Shortens Settlement Cycle in Response to Meme Stock Frenzy

Gensler could reduce standard settlement cycle even further

SEC Chair Gary Gensler

Chip Somodevilla/Getty Images

The Securities and Exchange Commission, responding to the meme stock fad of 2021, approved a proposal to cut the standard settlement cycle for most broker-dealer securities transactions to one business day after the trade (T+1) from two (T+2). The change takes effect on May 28 of next year. 

Key Takeaways

  • SEC votes 3-2 to shorten the standard settlement cycle for most broker-dealer transactions in securities to T+1 from T+2.
  • The final rules will become effective 60 days after publication in the Federal Register and have a compliance date of May 28, 2024.
  • Changes "will make our market plumbing more resilient, timely, orderly, and efficient,” said SEC Chair Gary Gensler.

Gensler Says Change Aims to Boost Efficiency

“It will reduce latency, lower risk, and promote efficiency as well as greater liquidity in the markets,” said SEC Chair Gary Gensler. “Today’s adoption addresses one of the four areas the staff recommended the Commission address in response to the meme stock events of 2021. Taken together, these amendments will make our market plumbing more resilient, timely, orderly, and efficient."

A T+1 settlement cycle, the norm in the 1920s, is also used by the U.S. Treasury market and was adopted by India in January.

Benefits Come With Risks

The changes are expected to reduce the credit, market, and liquidity risks faced by market participants and U.S. investors. It will also reduce the number of unsettled trades.

The move isn't risk-free. It could mean that investors have less time to correct errors or freeze from being moved in the case of potential fraud, according to Commissioner Mark Uyeda, who voted against the measure. It passed 3-2.

A Change to Institutional Trades

Still, the rules will improve the processing of institutional trades. Broker-dealers will be required to either enter into written agreements or establish, maintain, and enforce written policies and procedures designed to ensure allocations, confirmations, and affirmations are completed as soon as technology permits and by the end of the trade date. 

The rules also require registered investment advisers to keep records of allocations, confirmations, and affirmations. There will also be a requirement for clearing agencies that provide matching services to facilitate straight-through processing.

The Bottom Line

In March 2020, following the outbreak of COVID-19, and in January 2021, following the heightened interest in meme stocks, market volatility highlighted potential vulnerabilities in the U.S. securities market that can be mitigated by shortening the standard settlement cycle and improving institutional trade processing. According to Gensler, shortening the standard settlement cycle even further may also help.

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  1. “SEC Finalizes Rules to Reduce Risks in Clearance and Settlement

  2. Bloomberg. “India Bluechips Set to Shift to World’s Fastest Settlement Cycle