The US Securities and Exchange Commission (SEC) has recently implemented new rule changes aimed at decreasing risks involved in securities clearance and settlement by reducing the settlement cycle to one business day, or T+1.
The move from T+2 to T+1 was agreed upon a year ago and is expected to improve institutional trade processing by introducing stricter broker-dealer requirements and mandating the registration of investment adviser records.
Improving Institutional Trade Processing
The new rules require broker-dealers to have written agreements or policies and procedures that guarantee the completion of allocations, confirmations, and affirmations as soon as technologically feasible and no later than the trade date's end. This approach is expected to enhance institutional trade processing, making the allocation of trades more timely, orderly, and efficient.
Similarly, registered investment advisers must maintain and keep records of the allocation, confirmation, and affirmation of securities transactions. This requirement will ensure that advisers have documentation of their actions, enabling them to follow up on client inquiries quickly and accurately.
New Requirement to Facilitate Straight-Through Processing
Additionally, clearing agencies that provide central matching services will be subject to a new mandate to facilitate straight-through processing for particular types of securities. This rule will ensure that these agencies adhere to certain standards and provide efficient processing.
According to SEC chair Gary Gensler, "Taken together, these amendments will make our market plumbing more resilient, timely, orderly, and efficient." By implementing these changes, the SEC aims to address one of the four areas that the staff recommended the Commission address in response to the 2021 meme stock events.
Market participants have until May 24, 2024, to comply with these changes, presenting a tight deadline that is concerning to some firms. The implementation of these rules requires significant technology and operational improvements, and firms had requested an extension due to the magnitude of these tasks. However, the SEC's decision not to grant an extension means that firms must now take swift action to avoid adding risk to the system. The industry will need to invest in technology and process changes to ensure that the new settlement cycle is executed successfully.
The SEC's new rule changes are a critical step in the right direction in improving risk management in securities clearance and settlement. By implementing the T+1 settlement cycle, mandating stricter broker-dealer requirements, and requiring registration of investment adviser records, the SEC aims to enhance market plumbing and improve efficiency. Although firms will face challenges with the tight deadline, these rules will help mitigate risks in the securities market, making it a safer and more reliable environment for investors.