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Statement on the Proposed Rule Amendment to Shorten the Transaction Settlement Cycle

Commissioner Kara M. Stein

Sept. 28, 2016

Good morning.  I would like to thank staff in both Trading and Markets and DERA for their hard work on this proposal to shorten the settlement cycle for securities transactions.  In particular, I would like to thank Jeffrey Mooney, Susan Petersen, Natasha Greiner, Charles Lin, and Narahari Phatak.
The clearance and settlement process has evolved dramatically over the past several decades.  It used to be dependent on “runners” or messengers who would deliver orders and paper stock certificates by hand between brokerage firms.  As our capital markets grew, so did the amount of paperwork involved.  The manual processes and paperwork associated with securities transactions ultimately became untenable and led to the so-called “Paperwork Crisis.”[1]  Congress responded in 1975, asking the Commission to establish a national system for the clearance and settlement of transactions.  Congress also directed the Commission to create the rules governing market participants involved in the clearance and settlement process. 
Today’s third release seeks to update a rule that was created in 1993, which specifies how quickly securities must settle after the trade date.[2] The proposal would shorten the time to transfer and pay for securities after a trade from three days to two.
The proposed rule should reduce risks faced by market participants, whether retail or institutional investors, broker-dealers, custodial banks, central clearing parties, or systemically important financial market utilities (“FMUs”).  As we saw during the 2008 financial crisis, longer settlement periods are associated with increased counterparty default risk, market risk, liquidity risk, credit risk and overall systemic risk.[3] 
Just a one day change will help mitigate the risks of an unnecessarily long settlement cycle that have persisted despite rapid improvements in technology.[4]  A shorter settlement time also should make the market more efficient.  Moreover, given the advances in computer hardware and software already in use by market participants,[5] the move to T+2 is not only possible, but also should lay the groundwork for an even shorter settlement cycle.[6]  
Undoubtedly, reducing the settlement cycle will involve changes and costs.  Additionally, market participants will need to consider how reduced settlement cycles fit within the larger clearance and settlement ecosystem, and the possible impact on payment systems as a whole.  I invite commenters to also weigh in on their experiences in foreign jurisdictions, which have already transitioned to a shorter settlement cycle.[7]
Finally, I would like to thank Commissioner Piwowar for all his work on this issue.[8]  
I look forward to receiving everyone’s best thoughts and comments on this proposal.
Thank you.
[1] See e.g., U.S. Securities and Exchange Commission, Study of Unsafe and Unsound Practices of Brokers and Dealers, H.R. Doc. No. 231, 92d Cong., 1st Sess. 13 (1971).
[2] See Securities Transactions Settlement, Exchange Act Release No. 33023 (Oct. 7, 1993), 58 FR 52891.  Prior to the Commission’s adoption of Securities Exchange Act Rule 15c6-1 in 1993, market custom and practice was to settle securities transactions within five business days of a trade (“T+5”).  The Commission adopted the trade date plus three rule (“T+3”) in 1993, thus formalizing a shorter settlement cycle.  At that time, the Commission noted the benefits of shortening the settlement cycle, which included reducing credit and market risk exposure to unsettled trades, reducing liquidity risk and encouraging greater efficiencies in clearance and settlement in order to facilitate a reduction in systemic risk for the US markets.  The Commission contemplated further reductions in the settlement cycle in 2004.  See also, Securities Transactions Settlements, Exchange Act Release No. 49405 (Mar. 18, 2004), 69 FR 12922.
[3] See e.g., Omgeo, “The Road to Shorter Settlement Cycles: Creating a Trade Date Environment in the US and Across Global Markets” (Mar. 2013), available at (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).
[4] The term “settlement cycle” generally refers to the time between when a trade is made and the time the buyer must make payment and the seller must deliver the security.
[5] See, e.g., Amendment to Securities Transaction Settlement Cycle, Exchange Act Release No. 34-78962 (Sept. 28, 2016) (the “Proposed Rule”) at pages 131-132 (noting that overall costs associated with a transition may be lower given that some entities may be able to repurpose existing systems).
[6] Id. at 63. (citing statistics from the Depositary Trust & Clearing Corporation, or DTCC, which indicate that on average, 45% of trades are affirmed on the trade date or “T” while 90% are affirmed on T+1, and 92% are affirmed by noon on T+2);  see also, “The Recommendation of the Investor Advisory Committee: Shortening the Trade Settlement Cycle in U.S. Financial Markets” (Feb. 12, 2015) available at (recommending the Commission consider the implementation of a T+1 settlement period at least for US equities and other US securities as soon as possible).
[7] See European Central Securities Depositories Association, “A very smooth transition to T+2” (Oct. 2014), available at (discussing the European markets transition from T+3 to T+2 settlement cycle).
[8] See, e.g., Cmrs. Michael S. Piwowar and Kara M. Stein, “Statement Regarding Proposals to Shorten the Trade Settlement Cycle” (June 29, 2015) available at; see also, Cmr. Luis Aguilar, “The Benefits of Shortening the Securities Settlement Cycle” (July 16, 2015), available at
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