SEC Proposes Faster Trade Settlement Times in Wake of Meme Stock Mania

SEC proposes moving trade settlements to T+1

By
Timothy Smith
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Tim Smith has 20+ years of experience in the financial services industry, both as a writer and as a trader.
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Published February 10, 2022

The Securities and Exchange Commission (SEC) on Wednesday proposed to speed up the standard trade settlement time for most equities to one business day after the transaction (T+1) from two business days (T+2), aiming to reduce risks for market participants and U.S. investors.

Key Takeaways

  • The SEC has proposed to speed up the trade settlement cycle to T+1—one business day after the transaction—aiming to reduce risks for market participants and investors.
  • The proposal comes roughly a year after Robinhood temporarily suspended trading in meme stocks to ensure it could meet deposit requirements.
  • A T+1 settlement cycle would help market participants better understand clearing obligations.
  • Broker industry group SIFMA said the plan will reduce risks while a trade is being finalized. 

A move to quicker settlement times would come as welcome news for app-based brokers like Robinhood Markets Inc. (HOOD). The plan seeks to cut credit, market, and liquidity risks.

Robinhood temporarily suspended trading in stocks like GameStop Corp. (GME) and AMC Entertainment Holdings Inc. (AMC) at the height of the meme stock frenzy last January. The brokerage did this to ensure it met deposit requirements after retail investors piled into these institutionally-held stocks, seeking to force a short squeeze rally.

A T+1 settlement cycle would help market participants gain a better understanding of where the money and shares were coming from to meet clearing obligations, if a similar scenario were to happen again.

“The existing two-day period to settle trades exposes investors and the industry to unnecessary risk and is ripe for change,” Robinhood CEO Vlad Tenev said at the time on the trading app’s blog. “We want to join together to move forward to real-time settlement,” he added. 

SEC Chair Gary Gensler’s echoed Tenev’s comments in a statement yesterday, saying the "proposed amendments to the securities clearing and settling process, if adopted, could lower risk to the financial system and drive greater efficiencies in the markets. Shortening the settlement cycle should reduce the amount of margin that counterparties would need to post with clearinghouses.” Gensler said.

Central clearinghouses play a pivotal role in the settlement process by overseeing trading activity and ensuring brokers meet contractual obligations. If a market participant fails, a central clearinghouse typically covers the cost of mismatched trades to provide market stability.

A clearinghouse is a designated intermediary between a buyer and seller in a financial market. The clearinghouse validates and finalizes the transaction, ensuring that both the buyer and the seller honor their contractual obligations.

Industry Group Backs Move

The Securities Industry and Financial Markets Association (SIFMA) threw its support behind faster settlement times. “The change will improve market resiliency by further reducing risk that exists while a trade is being finalized, benefit investors by shortening the execution time frame between buying or selling their securities, and reduce the level of margin market participants must post to offset the settlement risk,” the group’s CEO Kenneth Bentsen said in a statement.

The SIFMA is a not-for-profit trade association that represents securities brokerage firms, investment banking institutions, and other investment firms. The organization’s membership represents 75 percent of the U.S. broker-dealer sector by revenue and 50 percent of the asset management sector as measured by assets under management.

Straight Through Process Also in Focus

In addition to shortening settlement times, the agency is proposing speeding up trade confirmations to ensure brokers complete them by the end of the trade date. It also proposes certain types of clearing agencies that provide matching services to facilitate straight-through processing (STP), which is an automated process done purely through electronic transfers. Furthermore, the STP changes will require an annual report on the progress under the proposal.

The proposed same-day trade settlement cycle now enters a 60-day period for public comment before the agency’s five-member bipartisan commission votes on making the change permeant.

Article Sources
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  1. U.S. Securities and Exchange Commission. "SEC Issues Proposal to Reduce Risks in Clearance and Settlement."

  2. Robinhood. "It's Time for Real-Time Settlement."

  3. MarketWatch. "Gensler's Aggressive Agenda Continues as SEC Proposes Shortening Settlement Times in Wake of GameStop Saga."

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