Tuesday, February 15, 2022

T+1: The Future is Now (or at least as early as 2024)

The SEC Boldly Sets Course for T+1 and T+0

Author: David Schwartz J.D. CPA

While real-time settlement is still something that may happen far in the future, perhaps on the Starship Enterprise, T+1 is now imminent. On February 9, 2022, the Securities and Exchange Commission proposed to make T+1 a reality. The proposal aimed at reducing risks in clearance and settlement seeks comment on shortening the current T+2 standard settlement cycle for most broker-dealer transactions by one day to T+1. Notably, the proposal also makes clear that T+0 is the ultimate and eventual goal and explicitly solicits comments on associated challenges and potential paths to achieving a same-day settlement cycle.


With the SEC's ultimate goal of T+0 explicitly in mind, the Commission sets in motion the imminent but intermediate move to T+1 by: 


  1. Shortening the standard settlement cycle for securities transactions from two business days after the trade date (T+2) to one business day after the trade date (T+1);[1]
  2. Eliminating the separate T+4 settlement cycle for firm commitment offerings priced after 4:30 p.m.;[2]
  3. Improving the processing of institutional trades by proposing new requirements for broker-dealers and registered investment advisers intended to improve the rate of same-day affirmations;[3] and
  4. Facilitating straight-through processing by proposing new requirements applicable to clearing agencies that are central matching service providers (CMSPs).[4]


The Commission states that after "[taking] current industry initiatives and their relative progress into consideration, the Commission preliminarily believes there has been collective progress by market participants sufficient to facilitate a transition to T+1." [5] Consequently, if adopted, the SEC has set a compliance date of March 31, 2024. The release fixes a sixty-day comment period, ending April 11, 2022.


For some time, many players in the securities industry have anticipated such a move to T+1. In December of 2021, DTCC, SIFMA, and ICI jointly published a whitepaper laying out a path to shorten the securities settlement cycle. "Accelerating the U.S. Securities Settlement Cycle to T+1" proposes an industry migration timeline and details anticipated changes that market participants should consider and put in place to transition to T+1 and, ultimately, T+0.  


The SEC likely took this and other industry work on the transition to T+1 into account when formulating their proposal. The Commission has shortened the settlement cycle on two previous occasions — from T+5 to T+3 in 1993 and from T+3 to T+2 in 2017. Chairman Gensler pointed out, "these changes were made possible by new technologies that made the settling process more efficient." The pace of new technology since 2017 has undoubtedly played a role in the SEC's decision to shorten the settlement cycle with an eye on reducing risk once again. Distributed ledgers, cloud computing, and blockchains can aid in rapid clearing while at the same time reducing transaction risk. 


Depending on how the industry tackles the move to T+1 before March 2024, we may reach T+0 at warp speed. 



[1] Specifically, the SEC is proposing amendments to Exchange Act Rule 15c6-1(a) that would prohibit a broker-dealer from effecting or entering into a contract for the purchase or sale of a security (other than exempted securities) "that provides for payment of funds and delivery of securities later than the first business day after the contract date unless otherwise expressly agreed to by the parties at the time of the transaction."

Proposed Exchange Act Rule 15c6-2 would prohibit broker-dealers from entering into contracts for the purchase or sale of a security (other than exempted securities) with their institutional customers unless those contracts require that the parties complete allocations, confirmations, and affirmations as soon as technologically practicable and no later than by the end of the trade date. 


[2] The proposed deletion of Exchange Act Rule 15c6-1(c) would promote a uniform approach to the settlement of primary and secondary offerings. Paragraph (c) establishes a T+4 settlement cycle for firm commitment offerings placed after 4:30 p.m.


[3] Proposed amendment to Advisers Act Rule 204-2 would require registered investment advisers that are parties to contracts under Rule 15c6-2 to make and keep records of confirmations received and allocations and affirmations sent. 


[4] Proposed Exchange Act Rule 17Ad-27 would require a clearing agency that is a CMSP to establish, implement, maintain, and enforce policies and procedures that facilitate straight-through processing and describe in an annual report its current procedures, progress, and the steps it intends to take to facilitate straight-through processing of institutional trades.


[5] Proposal at p. 41