SEC Adopts Move to T+1 Standard Settlement Cycle

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SEC Amends Exchange Act Rule 15c6-1 to Require Settlement of Routine Securities Trades in One Business Day Following Trade Date.

On February 15, 2023, the Securities and Exchange Commission (the "Commission") adopted a rule amendment to shorten the standard settlement cycle for most routine securities trades from two business days after the trade date to one business day after the trade date (or from "T+2" to "T+1" in common parlance).1 The amendment is one way in which the Commission is seeking to address recent episodes of market volatility, which include the "meme stock" events of 2021 and the COVID-19 pandemic. The final rules will become effective 60 days following the date of publication of the adopting release in the Federal Register, but the compliance date for the rule change will be May 28, 2024.

The Commission believes that shortening the settlement cycle will reduce credit, market and liquidity risks arising from unsettled securities trades. This shortened time period between execution and settlement of trades should reduce the number of unsettled trades overall, the time period of exposure to those unsettled trades and potential price movements in the securities underlying unsettled trades. Implementing T+1 will also enable investors to access the proceeds from securities transactions sooner than they are able in the current T+2 environment.

The final rules also shorten the settlement cycle for firm commitment underwritten offerings for securities that are priced after 4:30 p.m. ET. Under current rules, firm commitment underwritten offerings that price after 4:30 p.m. ET are permitted to settle up to four business days after the date of the contract (e.g., the date of the underwriting agreement in a registered underwritten offering). As a matter of common practice, however, most firm commitment underwritten offerings that price after 4:30 p.m. ET settle not longer than three business days after the date of the contract. Under the new rules, such offerings must now settle on the second business day after the date of the contract. In contrast, if such offering prices before 4:30 p.m. ET (which would be unusual in ordinary circumstances), it would be required to settle one business day after the contract.

The new rules do not alter the existing ability of the parties to vary settlement dates by express agreement at the time of the transaction. If the circumstances of the offering require an express agreement to extend the standard settlement cycle, it is standard practice to provide disclosure of the alternative settlement cycle to investors through the offering document and in a free writing prospectus or pricing term sheet.

The exceptions in the current rules generally remain unchanged. These include the types of securities exempted or excluded from the standard settlement cycle. However, the adopted amendment will for the first time completely exclude security-based swaps from the settlement cycle requirement under Rule 15c6-1, noting the innate differences between securities-based swaps from other securities transactions.

Looking forward, the Commission envisions the upcoming transition to a T+1 settlement cycle as the first step to identifying potential paths to a T+0 or instantaneous settlement cycle. The Commission staff is continuing to monitor the future feasibility of T+0.

1 The final rule is available here (Shortening the Securities Transaction Settlement Cycle) and the corresponding fact sheet is available here. See also, SEC Press Release (SEC Finalizes Rules to Reduce Risks in Clearance and Settlement).

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