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SEC Proposes Rule Amendment to Shorten Trade Settlement Cycle from T+3 to T+2

On September 28, 2016, the SEC issued a proposal to shorten the standard settlement cycle for most broker-dealer securities transactions from three business days after the trade date (T+3) to two business days after the trade date (T+2).

According to the Commission, the amendment would prohibit a broker-dealer from entering into a contract for the purchase or sale of a security (with certain exceptions) that provides for payment of funds and delivery of securities later than two business days after the trade date, unless otherwise expressly agreed to by the parties at the time of the transaction. Transactions in government securities and commercial paper have shorter settlement periods and will not be affected by the proposed change. Mutual fund transactions through broker-dealers currently are required to settle within three business days, although many mutual funds have a shorter settlement period.

The Commission stated that shortening the standard settlement cycle to T+2 could result in a further reduction of credit, market, and liquidity risk for all U.S. market participants, which in turn could reduce systemic risk for U.S. market participants. The rule proposal follows an industry-led initiative which has already targeted September 5, 2017, as the date for the transition to T+2.

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