In February 2023, the Securities and Exchange Commission (SEC) announced rule changes to the standard settlement cycle for most broker-dealer transactions insecurities from two business days after the trade date (T+2) to one (T+1).  The final rule* is designed to benefit investors and reduce the credit, market, and liquidity risks in securities transactions faced by market participants.

What was the catalyst for such a change? Two recent episodes of increased market volatility – in March 2020 following the outbreak of the COVID-19 pandemic, and in January 2021 following heightened interest in certain “meme” stocks –highlighted potential vulnerabilities in the U.S. securities market that shortening the standard settlement cycle and improving institutional trade processing can mitigate.

While the rule final date is scheduled for May 28, 2024, what are the steps you need to take now to prepare your firm and employees? Certain broker-dealers, including those that are small entities, may need to make changes to their business operations and incur certain costs to operate in a T+1 environment. For example, conversion to a T+1 standard settlement cycle may require broker-dealers, including those that are small entities, to make changes to their business practices, as well as to their computer systems, and/or to deploy new technology solutions. In addition, broker-dealers, including small entities, may need to test changes to systems, operations, policies, and procedures to operate in a T+1 environment. Broker-dealers, including small entities, that serve retail customers may also need to educate their employees and customers regarding the shorter standard settlement cycle that the amendment to Rule 15c6-1(a) establishes.

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What are some next steps you can take to begin preparation?

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1. Review policies and procedures to update business practices
2. Review internal computer systems and technology
3. Reach out to third party solicitors you are engaged with to discuss implementation needs and time frames
4. Test any systems well before May 28, 2024 for compliance
5. Provide training to employees on changes to business practices and procedures
6. Consider providing education to customers to announce the change

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Resources used:

SEC.gov| SEC Finalizes Rules to Reduce Risks in Clearance and Settlement

34-94196-fact-sheet.pdf(sec.gov)

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Key Terms: Settlement, Trade date, T+1, Standard settlement, Settlement cycle, T+2

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