SEC Adopts T+1 Settlement Cycle

Category: Client Alerts
Date: Feb. 23, 2023
Title: SEC Adopts T+1 Settlement Cycle

On Feb. 15, the Securities and Exchange Commission (SEC) adopted final rule amendments to Exchange Act Rule 15c6-1 to shorten the standard settlement cycle for most securities transactions from two business days after trade date (T+2) to one (T+1). The SEC also adopted new rules related to institutional trades by broker-dealers to facilitate efficient trade processing. The SEC press release is available here, including links to the final rule amendments and a summary fact sheet.

Shortened Settlement Requirements

Subject to the firm commitment offering and “override” provisions described below, under amended Rule 15c6-1, broker-dealer contracts for the purchase or sale of securities (other than certain exempted securities and security-based swaps) will generally be required to provide for the payment of funds and delivery of securities no later than T+1.

For firm commitment offerings priced after 4:30 p.m. ET, broker-dealer contracts will generally be required to provide for settlement no later than T+2 (currently T+4).

In addition, the amended rules retain the existing override provision that allows parties to expressly agree to a different settlement date at the time of the transaction. This retains flexibility for complex offerings in which T+1 settlement is impractical, such as certain securitization transactions, bond offerings and underwritten resale offerings.

Same-Day Allocations and Affirmations

The final rules also impose procedural requirements for allocations, confirmations and affirmations, which are designed to improve processing of institutional trades. Under new Rule 15c6-2, broker-dealers will be required either to enter into written agreements with their customers or other relevant parties to a transaction or to establish, maintain and enforce written policies and procedures reasonably designed to ensure the completion of allocations, confirmations and affirmations as soon as technologically practicable and no later than the end of the trade date.

Next Steps

The T+1 settlement requirements are set to take effect on May 28, 2024. In the lead-up to this transition, parties should consider any potential operational challenges to compliance. Parties should also be aware of the effects a shortened settlement cycle could have on compliance with other rules, such as requirements to close out fail to deliver positions under Regulation SHO.

These amendments are intended to modernize settlement cycles to reflect technological advances and to reduce credit, market and liquidity risks. While the SEC is not proposing a same-day (or T+0) settlement cycle at this time, it is continuing to assess potential paths to implement T+0.