Commissioner Voices Frustration Over Delay in SEC Proposal for T+2 Settlement

Concerns arise over a delay in SEC proposal to shorten trade settlement from T+3.

Following a delay from the US Securities and Exchange Commission (SEC) to issue a proposal on shortening the trade settlement cycle by one day from T+3 to T+2, SEC Commissioner Michael S. Piwowar just voiced his concerns in an official statement.

When orders to buy/sell securities are executed in U.S. stocks markets, resulting in a trade, these trades are settled in three days after the trade date (T+3).

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Shortening this settlement cycle by one day to T+2 is expected to improve market efficiency, and reduce risk, while conforming to settlements cycles with other financial markets abroad. The change would require firms to adjust their post-trade systems and clearing agreements, among other revisions, yet only by 1 day – leaving 2 days for the trade settlement cycle to complete.

Industry support for T+2

SEC Commissioner Piwowar said that it had been just over a year since he and Commissioner Stein had issued a joint statement in support of a proposal to shorten the trade settlement cycle, which had received industry support.

 

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June 2016 action date missed

Although this project was added to the agency’s agenda with a June 2016 action date, the delay thus far was noted as ‘unacceptable’ causing the commissioner to issue an official statement on the delay, as the proposal has yet to be published by the SEC.

Michael S. Piwowar Source: SEC.gov
Michael S. Piwowar
Source: SEC.gov

He noted that – aside from the delay causing his own frustrations over the matter – it was detrimental to efforts to improve investor protection, and left market participants wondering.

In addition, he wrote that the failure for the proposal to be made was in contravention of the agency rule list published in the most recent Regulatory Flexibility Agenda.

Is T+0 next?

The appeal of shortened or even eliminated trade settlements (i.e. instantaneous settlement) via the use of distributed-ledger or blockchain technologies have been in discussion across various industries in finance recently, yet this settlement period also provides a time-buffer on potential trade errors that need to be rectified before trades settle.

Furthermore, the settlement period also allows corporations such as banks, clearing firms and brokerages to carry related transaction values which help buffer their balance sheets or accounting processes – even if only for a few days at a time.

These ‘times’ (or settlement durations) can add up to millions or billions in unsettled trade value, which can also help with buffering risk-management related to clearing or required margin/collateral for counterparties and dealers. Conversely, this capital or collateral that would otherwise be freed up from a T+0 instantaneous settlement period could be put to work elsewhere, as explained by Dr. Jock Percy, CEO of Perseus, in a guest article on Finance Magnates in May.

Unsettled settlement issues

For now, the SEC proposal remains literally unsettled, until it is published for public commentary. Once the proposal is made, then steps typically involved before new rulemaking is enacted would take place, including a public comment period – and if passed T+2 would speed up trade settlement for US stock markets by a third.

The news follows the SEC’s announcement earlier today that the Chief of its Whistleblower office is slated to step down, as reported by Finance Magnates this Friday.

 

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