Increasing Market Fairness and Efficiency for Investors

The Commission’s ongoing project to modernize many of the rules that govern the day-to-day operations of our capital markets is essential to advancing the interests of the investing public. Where there are unnecessary risks and inefficiencies, it is our responsibility to tackle them and ensure that we fulfill our mission of maintaining fair, orderly and efficient markets.

The Commission today adopts a final rule that will not only advance this important part of our mission, but will help reduce market volatility, foster broad-based capital formation, and strengthen investor protections. Reducing the securities transaction settlement cycle from two business days (“T+2”) to one (“T+1”) is a significant milestone for our markets.

Why does this matter to the investing public? Because buyers and sellers of securities will receive their cash and securities a day earlier under T+1 than they do currently. And because market participants can allocate their capital more quickly and efficiently. Based on the public comments to the proposal, these benefits accrue to retail investors in particular.

Reducing the current settlement time in half will alleviate some of the downsides of the current T+2 cycle, such as counterparty, market, liquidity, credit, and other risks. A longer settlement time also requires risk management tools, such as margin requirements, that carry significant costs. Shortening the settlement cycle not only helps reduce these risks and costs but lowers volatility and makes our markets more fair and efficient.

The risks of longer settlement times are not just theoretical. In January 2021, unprecedented price volatility in so-called “meme stocks” challenged many retail investors’ faith in our in financial markets. Clearing agencies in equities and options experienced record volumes cleared. In the face of high volume and volatility, market utilities had to issue significant margin calls. In reaction to these margin calls, certain brokers restricted trading in some, or all, of the meme stocks. According to media reports, at least one broker’s decisions to halt trading came at the peak of the market and infuriated many retail investors. Investors have filed approximately 50 class action lawsuits claiming substantial harm from this broker’s trading halt.

The Commission has taken various actions to prevent another meme stock-type event from impacting the markets, including the recently proposed equity market structure reforms that address, among other things, best execution for retail investors. Shortening the settlement cycle to T+1 complements these reforms and helps mitigate some of the risks that drove stock price volatility and significant margin calls during the meme stock event.

The benefits to all market participants of efficiency and fairness are indisputable. And the sooner that our markets can benefit from T+1, the better off our country is. While some market participants have sought to delay the realization of these benefits by proposing to push back the rule’s compliance date by up to two years, the case on the merits for such a delay is unpersuasive.

The May 28, 2024 compliance date included in today’s adoption provides market participants with more time – roughly three additional months – than the March 2024 date initially proposed in the rule. I am confident that through coordination, cooperation and diligence the various market participants affected will focus their energies, harness their resources and apply their innovative capacities to effectuate a smooth transition to T+1 – 15 months from now.

It bears noting that the Depository Trust and Clearing Corporation, or DTCC, the market utility most central to the T+1 transition, recognized May 28, 2024 – after the three-day Memorial Day weekend – as a feasible compliance date. In addition, multiple individual commenters to the rule proposal supported a transition date at least as soon as, if not sooner, than March 31, 2024.

The transition to T+1 is a game-changer but it is not the end of the road. The Commission must continue to engage with all stakeholders, particularly public policy advocates and investors, to explore whether shortening the settlement cycle to the same day, or T+0, would further reduce risks and their attendant costs, and provide additional benefits to our capital markets and the investing public. While some market participants have expressed concerns about possible costs and technological challenges with same-day settlement, these concerns must be weighed against the significant benefits to investors and to our capital markets.

I’m pleased to support today’s rule and commend the Division of Trading and Markets and the Commission staff for their diligent work on this adoption and for their dedication to investor protection and the public interest.