Skip to main content

Statement on the Proposed Shortening of the Settlement Cycle

Feb. 9, 2022

Thank you Chair Gensler, and thank you to my fellow Commissioners. 

The clearance and settlement of securities transactions is sometimes referred to as the “plumbing” of our markets.[1]  As with household plumbing, it’s not highly visible, and when it’s working properly, it doesn’t get a lot of attention.  However, it is crucially important to the functioning of our capital markets.

In January 2021, the market experienced significant volatility and high trading volumes in connection with the trading of certain “meme” stocks.[2]  Clearing agencies issued margin calls and additional capital charges on broker-dealers to manage the risk associated with the unusual trading activity.[3]  Some retail brokers reacted by restricting buying activity by their customers in certain stocks.[4]

These events raised numerous questions, including whether broker-dealers are adequately disclosing their policies and procedures around potential trading restrictions, and whether their margin and liquidity requirements are sufficient.  They also put a spotlight on the clearing process.  Clearing agencies are essential to managing risk; in particular, the risk that a trade will fail.  They act as central counterparties for almost all equities and options trades in the U.S. markets, serving as the buyer to every seller and the seller to every buyer to lessen the risks associated with the potential that a counterparty to the trade fails to perform.[5] 

However, unsettled transactions still carry risks, and the longer the settlement process, the greater the risks. Longer settlement periods are associated with increased counterparty default risk, market risk, liquidity risk, credit risk and overall systemic risk.[6]  The rules and rule amendments we are proposing today would shorten the standard settlement cycle by one day, to T+1, and should thereby better protect investors, reduce risk, and increase operational efficiency.[7]  While this change will entail costs, it has widespread support among market participants.[8]

The proposal also solicits comment on the path to what we refer to as T+0, which is settlement by the end of the trade date.  Given the ever-increasing pace of advancements in technology, including distributed ledger technology, further shortening the standard settlement cycle in the near future may be both desirable and feasible.[9]  Indeed, some such efforts are already underway.[10]  I look forward to reviewing comments on all aspects of the proposal, and I am particularly interested in hearing from market participants on the potential for further acceleration.

Thank you to the staff in the Division of Trading and Markets, the Division of Economic and Risk Analysis, and the Office of the General Counsel for all of the hard work that went into this proposal.  I am pleased to support it and I look forward to reviewing the comments.


[2] See Securities and Exchange Commission, Staff Report on Equity and Options Market Structure Conditions in Early 2021 (October 14, 2021).

[3] Id. at 31-32.

[4] Id. at 32-35.

[5] Shortening the Securities Transaction Settlement Cycle, Securities Exchange Release No. 34-94196 (February 9, 2022) (the “Proposal”) at 20.

[6] See Commissioner Kara M. Stein, Statement on the Proposed Rule Amendment to Shorten the Transaction Settlement Cycle (September 28, 2016), citing Omgeo, “The Road to Shorter Settlement Cycles: Creating a Trade Date Environment in the US and Across Global Markets” (March 2013) (noting generally that the crisis highlighted how a three day settlement period can create substantial systemic risk in times of extreme market volatility and uncertainty).

[7] Proposal at 1.

[9] Proposal at Section IV.

[10] See Proposal at 123-24 (describing DTCC’s “Project ION” pilot program, which allows participants to test the use of distributed ledger technology alongside traditional settlement infrastructure, and BOX Exchange LLC’s recently-implemented Boston Security Token Exchange platform to enable access to accelerated settlement for certain securities).

Return to Top