Statement on Final Rule on Shortening the Securities Transaction Settlement Cycle

Thank you, Chair Gensler. Today, the Commission considers rule amendments to shorten the settlement cycle for certain securities transactions from two business days to one business day after the trade date, a standard known as “T +1.”[1] The Commission is also considering requiring broker-dealers to either enter into written agreements, as specified in the rule, or establish, maintain, and enforce written policies and procedures reasonably designed to address certain objectives related to completing allocations, confirmations, and affirmations and to require investment advisers to make and keep records regarding the same.[2]

Nearly all commenters agree that shifting the transition to T + 1 could be highly beneficial across time.[3] For investors, quicker access to the results of a transaction has obvious benefits. Beyond that, shortening the settlement time reduces the risk of unsettled trades— that is, the risk of a counterparty failing to deliver cash or securities. A reduction in settlement cycle duration could reduce exposure to potential disruptions caused by price volatility while also lowering the value of outstanding obligations. These benefits may result in reduced margin requirements as well as enhanced operational efficiency. Thus, I am supportive of this change, at least conceptually.

A key ingredient for success in shortening the settlement cycle has been acting in an incremental manner. In 2017, the Commission, under the leadership of Acting Chairman Michael S. Piwowar, moved the settlement cycle from T + 3 to T + 2.[4] Today, the markets appear ripe for further progress on this front.

However, ensuring that any changes have the effect of actually improving a market process that touches on many other complex financial processes is of vital importance. Appropriately, leading up to 2017, the Commission worked on improvement in a manner informed by industry and investor concerns and comments. This deliberate and incremental approach increases the likelihood of getting it “right”. Such an incremental approach recognizes that many regulatory and institutional shifts are best thought of as an evolutionary process involving a complex discovery and learning process.

As an important aside, this is not the approach that the Commission has taken regarding proposed rules involving equity market structure. Instead, the Commission proposed—side-by-side—four complex rules with interrelated effects—and did not even attempt to consider the combined impact of those proposals. Far from being an incremental process, where the Commission and other interested persons could learn from experience before proceeding with reforms, the Commission has launched a shock-and-awe approach with the hope that everything falls into place and – more importantly – improves on the status quo. Whether that will occur is an open question.

While the net benefits of a shorter settlement cycle are clear, T + 1 can potentially increase some operational risks. There will be less time to address errors within the process and, in some circumstances, less time to deal with trading entities that are suddenly confronting massive and unexpected trading losses within the settlement cycle timeframe. There is also less time for regulators to identify and freeze the potential proceeds from potential frauds, such as, insider trading and market manipulation, before those proceeds exit our jurisdiction. These arguments and considerations, however, do not ultimately weigh against shortening the settlement cycle, but they provide reason for ensuring readiness among market participants. This speaks to the implementation date.

Ensuring a smooth transition will take significant investment and systems changes as well as operational and computational testing among broker-dealers, clearing firms, investment advisers, custodians, payment systems, and so on. Detailed planning is required, as is process adjustment, organizational change, and changes in the relationships among market participants. There is asymmetry in terms of costs and benefits—a smooth transition would provide net benefits for investors and U.S. markets to be accrued over the long-term in the future. On the other hand, the downside of a rough, turbulent transition could be steep, and could induce substantial harm in the short-run. That asymmetry cautions us to provide sufficient time to ensure a smooth transition.

Many comment letters have emphasized the need for more time than the Commission proposed.[5] Many have pointed to the 2024 Labor Day weekend as the implementation date. It would have the added advantage that Canada is also moving forward with T + 1 around the same time. Instead, the Commission appears to be ready to adopt May 28, 2024 as the implementation date.[6] In my view, we are in an imprudent rush away from a sensible transition date and, for that reason, I am unable to support the final rule.

I thank the staff in the Divisions of Trading and Markets and Economic and Risk Analysis as well as the Office of General Counsel for their efforts in working on the issues raised in this proposal.