Statement on Rule Amendments Shortening the Settlement Cycle

It has now been over two years since GameStop and other “meme” stocks brought market structure into the spotlight.[1] While the events of January 2021 are no longer front-page news, the issues that they highlighted related to market structure and retail investing are still front of mind for the SEC. Since then, the SEC has proposed new rules on a wide range of issues implicated in the GameStop events, including securities lending,[2] short sale disclosures,[3] and most recently, a package of equity market structure reforms designed to improve outcomes for investors by increasing competition, transparency, and integrity in the markets.[4]

We also proposed rule amendments that would shorten the standard settlement cycle for most broker-dealer transactions from two business days after the trade date (“T+2”) to one business day after the trade date (“T+1”).[5] As I noted at the time, shortening the settlement cycle should better protect investors, reduce risk, and increase operational efficiency.[6] Specifically, a shorter settlement cycle should reduce the number of outstanding unsettled trades, reduce clearing agency margin requirements, and allow investors quicker access to their securities and funds. Longer settlement periods, on the other hand, are associated with increased counterparty default risk, market risk, liquidity risk, credit risk, and overall systemic risk.[7]

Commenters were overwhelmingly in favor of shortening the settlement cycle.[8] We received supportive comments from a broad range of stakeholders, including individual investors, investor advocates, clearing agencies, and broker-dealers.[9] Some commenters raised concerns regarding the proposed changes related to the processing of institutional trades,[10] firm commitment offerings,[11] and security-based swaps,[12] and the final rule reflects certain changes from the proposal in response to those comments. A number of commenters also raised concerns about the implementation timeline, which has been extended by several months from the proposed date to facilitate a smooth transition.[13] The new compliance date would provide market participants more than fifteen months to prepare for the transition.[14]

The proposal also included a request for comment on the possibility of settling trades by the end of the trade date, or what we call “T+0.” Some commenters highlighted challenges relating to multi-lateral netting, securities lending practices, and other issues.[15] However, many others expressed support for an eventual move to T+0.[16] While it is clear that T+0 will entail greater operational and technological challenges than the move to T+1, I agree with commenters that such a move may be both desirable and feasible in the future, and I look forward to working with my colleagues and stakeholders toward that important goal.[17]

Thank you to all of the industry members who have put considerable time and effort into helping us consider how to implement a T+1 settlement cycle. Thank you as well to all the commenters for your invaluable feedback. Finally, thank you as always to the SEC staff, in particular the staff in the Division of Trading and Markets, the Division of Investment Management, the Division of Economic and Risk Analysis, and the Office of the General Counsel, for all of your hard work and expertise. I am deeply appreciative of your efforts, and I am pleased to support the amendments.