Statement on Rules Regarding Clearing and Settling
Feb. 9, 2022
Today, the Commission is proposing several amendments to the securities clearing and settling process — what one might call the “market plumbing.” I support this release because, if adopted, I believe it could lower risk to the financial system and drive greater efficiencies in the markets.
Today’s release would do three things. First, it would shorten the standard settlement cycle — the period during which cash and securities in a transaction actually change hands — to one day after trade date (“T+1”). Currently, broker-dealers have two days to settle most securities transactions (“T+2”).
Clearinghouses — intermediaries that help ensure that buyers and sellers in our markets get their securities or cash — have lowered risk for the public and fostered competition in the securities markets since the late 19th century. Clearinghouses act as the middle counterparty between the buyer and the seller of a securities contract, guaranteeing the obligations of those parties.
Clearinghouses value positions on a daily basis and require both parties to post collateral to ensure that there is sufficient cushion in the event that any party defaults. Further, they minimize the risk and interconnectedness brought about by securities transactions.
As the old saying goes, time is money. Shortening the settlement cycle should reduce the amount of margin that counterparties would need to post with clearinghouses. Therefore, it would lower risk to and promote greater efficiency in the highly interconnected financial system.
Interestingly, if one goes back to the 1920s (prior to the establishment of the SEC), our capital markets had a one-day settlement cycle. It was first extended because messengers were getting too tired to make all their runs on Wall Street in the given time! Over the decades, the length of the settlement cycle has ebbed and flowed.
Since Congress gave the SEC authorities to shorten the settlement cycle in 1975, the Commission has twice done so — from T+5 to T+3 in 1993 and from T+3 to T+2 in 2017. These changes were made possible by new technologies that made the settling process more efficient.
Today, we have the technology not only to shorten the settlement to one day, but also to shorten key elements of the clearing process to trade date.
Thus, the second piece of today’s release would require affirmations, confirmations, and allocations to take place as soon as technologically practicable on trade date (“T+0”). These steps are key preparations that must take place prior to settlement. Ensuring that these three key elements of the clearing process take place as soon as technologically practicable on the trade date further lowers risk in the system.
Thirdly, the release would require clearing agencies that provide central matching services to have policies and procedures to facilitate straight-through processing — i.e., fully automated transactions processing.
Separately, the Commission is also issuing a robust request for comment around areas to consider with respect to potentially achieving same-day net settlement in the future. The technology actually exists today not just for same-day affirmations, confirmations, and allocations, but even for same-day settlement. There are many operational issues, however, so I am eager to hear the public’s feedback on what those might be and how we might address them. This important public feedback could help us consider moving to same-day net settlement, which could further lower risk to and enhance efficiency in the system.
Today’s release would address one of the four areas for potential study identified by Commission staff in their Report on Equity and Options Market Structure Conditions in Early 2021. Last January, the significant volatility and trading volume in so-called meme stocks prompted larger-than-usual margin calls on retail brokerages. Several retail brokerages restricted customer access to trading in certain stocks. The market was extremely volatile, and many investors were told they couldn’t buy at a critical time. I share the frustration of investors who were locked out from making certain trades.
I look forward to staff recommendations related to other areas from their Report with respect to equity market structure, digital engagement practices, and short selling.
I am pleased to support today’s proposal and, subject to Commission approval, look forward to the public’s feedback. I’d like to extend my gratitude to the staffs of our fellow regulatory agencies who consulted on these issues, including the Department of the Treasury and the Board of Governors of the Federal Reserve. I’d also like to thank the members of the SEC staff who worked on this rule, including:
- Haoxiang Zhu, David Saltiel, Matthew Lee, Jeff Mooney, Jesse Capelle, Andrew Shanbrom, Mary Ann Callahan, Susan Petersen, Tanin Kazemi, Joshua Nimmo, Laura Gold, Meredith Macvicar, Roni Bergoffen, Joaane Rutkowski, Tim White, Brice Prince, Josephine Tao, Mick Riley, Quinn Kane, Joseph Levinson, and Rob Hegarty from the Division of Trading and Markets;
- Jessica Wachter, Burt Porter, Oliver Richard, Lauren Moore, Juan Echeverri, and Andrew Glickman from the Division of Economic and Risk Analysis;
- Brian Johnson, Melissa Gainor, Holly Miller, Emily Rowland, Amanda Wagner and Amy Miller from the Division of Investment Management;
- Dan Berkovitz, Cynthia Ginsberg, Sean Bennett, Megan Barbero, Meridith Mitchell, Malou Huth, Robert Teply, and Monica Lilly from the Office of the General Counsel;
- Jonathon Ingram and Carolyn Sherman from the Division of Corporation Finance;
- Maggie Simmermon and Lindsay Topolosky from the Division of Examinations; and
- Ainsley Kerr and Jay Scoggins from the Division of Enforcement.