The Pressure to Shorten the Settlement Cycle From T+3 to T+2 Has Increased

Since early last year, the Securities Industry and Financial Markets Association(“SIFMA”) and the Investment Company Institute (“ICI”) have publicly supported the shortening of the settlement cycle from trade date plus three business days (“T+3”) to trade date plus two business days (“T+2”) for U.S. secondary market transactions in equities, corporate and municipal bonds, unit investment trusts, and financial instruments composed of these products in an industry-led initiative.  To that end, SIFMA and ICI submitted a letter to SEC Chair Mary Jo White expressing support of the efforts by the financial services industry to shorten the settlement cycle and identifying several Securities and Exchange Commission (“SEC”) and Self-Regulatory Authorities (“SROs”) rule changes that they believed would require amendment for an effective transition to T+2.

In September 2015, SEC Chair White responded to the ICI/SIFMA letter expressing her strong support for industry efforts to shorten the trade settlement cycle to T+2 and urging the industry to continue to pursue the necessary steps towards achieving T+2 by the third quarter of 2017. SEC Chair White also indicated that she instructed SEC staff to develop a proposal to amend SEA Rule 15c6-1(a) to require settlement no later than T+2.

To support this industry-led initiative, the Financial Industry Regulatory Authority (“FINRA”)  issued Regulatory Notice  16-09, in which FINRA is seeking comments on proposed amendments to FINRA rules relating to the settlement cycle.  FINRA proposes to adopt necessary rule changes in a manner and timeline that is consistent with the SEC and other self-regulatory organizations SROs in an effort to provide the regulatory certainty necessary for an efficient transition.

SEA Rule 15c6-1 currently establishes “regular way” settlement as occurring no later than T+3 for all securities, except for government securities and municipal securities, commercial paper, bankers’ acceptances, or commercial bills.  In anticipation of the SEC’s changes to SEA Rule 15c6-1 to facilitate settlement no later than T+2 and to ensure that FINRA acts in concert and conformity with the impending rule changes by other SROs, FINRA is proposing definitional changes to its rules pertaining to securities settlement by, among other things, amending the definition of “regular way” settlement as occurring on T+2.  The proposed technical changes would implement the anticipated rule changes of the SEC and the other SROs. Accordingly, FINRA believes that the proposed rule changes will not impose any burdens on the industry in addition to those necessary to implement the industry-wide initiative.

To this end, FINRA has preliminarily identified the following rules that establish or reference a T+3 settlement cycle that would need to be amended to reflect a T+2 settlement cycle:

  • NASD Rule 2830 (Investment Company Securities);
  • FINRA Rule 11140 (Transactions in Securities “Ex-Dividend,” “Ex-Rights” or “Ex-Warrants”);
  • FINRA Rule 11150 (Transactions in “Ex-Interest” in Bonds Which are Dealt in “Flat”);
  • FINRA Rule 11210 (Sent by Each Party); 0 FINRA Rule 11320 (Date of Delivery);
  • FINRA Rule 11620 (Computation of Interest); and 0 FINRA Rule 11860 (COD Orders)

FINRA encourages all interested parties to comment.  The comment period ends April 4, 2016.