The United States Securities and Exchange Commission (SEC) has finalized a change to its policy and now requires broker-dealer securities transactions to be settled within one business day (T+1). Currently, securities transactions are settled within two businesss days (T+2) after the trade is made.

However, the securities regulator, in a statement released on Wednesday, announced that the switch to T+1 will become effective 60 days after the finalized changes are published in the US Federal Register. Additionally, the SEC revealed the compliance date for the final rules as May 28, 2024.

SEC Explains Goal of New Securities Settlement Cycle

According to the securities market supervisor, the change in rules “is designed to benefit investors and reduce the credit, market, and liquidity risks in securities transactions faced by market participants.” Furthermore, the SEC in its detailed document on the development noted that the changes were informed in part by episodes of increased market volatility experienced in 2020 and 2021. These episodes “highlighted potential vulnerabilities in the US securities market,” the regulator wrote in the document.

Speaking about the final rules, the SEC explained that the new policy will improve the processing of institutional trades and will add a new requirement to facilitate straight-through processing that applies to certain types of clearing agencies that provide central matching services. In addition, the SEC noted that the final rules will require registered investment advisers to make and preserve records of the allocations, confirmations and affirmations for certain securities transactions.

“The final rules will require central matching service providers to establish, implement, maintain, and enforce new policies and procedures reasonably designed to facilitate straight-through processing and require them to submit an annual report to the Commission that describes and quantifies progress with respect to straight-through processing,” the SEC explained.

The Securities Settlement Journey from T+5 to T+1

The SEC took its first steps towards standardizing the securities settlement cycle in 1993 when it came up with the policy that required broker-dealers to settle securities transactions within three business days (T+3). At the time, securities transactions were settled within five business days (T+5).

The regulator started enforcing the current T+2 practice in 2017 after it shortened the standard settlement cycle from T+3.