Statement on Proposal to Shorten the Settlement Cycle
Feb. 9, 2022
For several weeks starting in early 2021, the U.S. financial markets saw an unexpected surge in interest from retail investors in a small number of stocks that some argued had been neglected and undervalued by the market. Fueled by social media, enthusiasm for these stocks spread like wildfire. As prices rose, so too did retail interest in the markets. Terms like “FOMO,” “diamond hands,” “to the moon,” “tendies,” and “stonks” found their way into the popular lexicon.
To be honest, though, as a regulator, my heart was particularly warmed as other terms entered the national conversation: terms like “net capital,” “clearinghouse deposits,” “settlement risk,” “settlement cycle,” “T+2,” “T+1,” and “T+0.” In all my years as a securities lawyer, I never thought that the day would come when normal people would want to have conversations with me about these arcane, technical issues, but after January 2021, they did. Unfortunately, with Covid still in full swing, my opportunities to bring these topics up in casual conversation were limited, but I was still happy to see that our market infrastructure was getting the broad public attention it deserves. Although they are technical, these terms describe issues that play a huge role in whether and how firms can trade and, accordingly, have real effects on all investors, including retail investors dipping their toes into the market for the first time.
The Commission has been thinking hard about these issues as well, and in today’s proposal, the staff is recommending that we publish a proposed rule that would shorten the settlement cycle to T+1 and solicit comment on further shortening it to same-day settlement, or T+0. Industry groups have been already discussing a path to T+1 settlement for a couple of years, so Commission action may not be necessary to move from T+2 to T+1. Indeed, as the recommended proposal notes, even in the 1920s, before the Commission came on the scene, the settlement cycle on Wall Street (with far less sophisticated technology and—admittedly—far lower volumes) was T+1.
Because the staff has prepared a thoughtful recommendation that I think will solicit helpful comment and generate a healthy discussion about how we might work with market participants to shorten settlement times, I am happy to support today’s proposal. Shortening the settlement cycle to T+1 should significantly reduce settlement risks and clearing costs in times of extremely high volume and volatility, which may help avoid some of the trading disruptions we saw last year. If the Commission has a role to play in facilitating the shorter settlement cycle, I believe it will be a good use of our time and resources to do so.
The proposal would establish—if the rule is finalized—a compliance date of March 31, 2024. I particularly look forward to commenters’ views on whether this timetable is adequate given the operational and other changes that would be required under the proposal.
I also am eager to review comments on the possibility of further shortening the settlement cycle to T+0. Same-day settlement may not provide sufficient benefits to the market to make the significant implementation costs and possible increase in operational and other risks worthwhile, but it makes sense to explore the shorter settlement cycle. Among the questions about which I am interested in hearing comment are: (1) Would a T+0 settlement cycle unnecessarily increase trading costs, including in some cases potentially requiring prefunding of transactions? (2) Would it force other changes that may significantly affect market structure in ways that decrease liquidity? (3) Would blockchain technology be useful in facilitating the transition to a T+0 timeframe? (4) How could the Commission go about working with the market to make the transition to T+0 if it does in fact seem worthwhile?
I would like to thank the staff for the time that they spent talking with me and my counsel about the proposal. In particular, I would like to thank Jeff Mooney, Moshe Rothman, and Matt Lee for addressing my many questions and concerns with the proposal.