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SEC Finalizes Rule on Shortening the Securities Transaction Settlement Cycle

On February 15, 2023, the Securities and Exchange Commission (SEC) approved a final rule to transition the securities settlement cycle in the United States from two days to one on May 28, 2024. According to an SEC press release in 2022, shortening the settlement cycle is intended to “better protect investors, reduce risk, and increase operational efficiency” across capital markets infrastructure. This is one of the most impactful pieces of regulation in recent years, profoundly affecting market participants across the industry in the US and worldwide.

By reducing the amount of time that market participants are exposed to credit risk, the likelihood of a default is also expected to lower by a great extent. This change also allows for more efficient use of capital, which benefits investors and market participants alike. Additionally, a shorter settlement cycle reduces operational and systemic risks, improving the financial system’s overall resilience.

The New SEC Rule on Securities Transaction Settlement Cycle:

  • The new rule applies to most broker-dealer securities transactions, including stocks, bonds, municipal securities, exchange-traded funds, and certain mutual funds.
  • The rule also requires that broker-dealers take specific steps to facilitate the shortened settlement cycle. For example, broker-dealers must update their systems and procedures to reflect the new settlement cycle and communicate with their counterparties to ensure they are prepared for the new cycle.
  • The final rule dictates that one should not enter into contracts that provide payment of funds later than one day after the trade. Unless there is a specific agreement stating the date and time of the transaction.
  • It also mandates that one shall not effect or enter into contracts for firm commitment offerings priced after 4:30 p.m. Eastern Time that provides for payment of funds and delivery of securities later than two days after the trade unless agreed to previously.
  • If a transaction requires confirmation, affirmation, or allocation, then the rule advises you to enter into written agreements with the relevant parties to ensure the completion of allocations, confirmations, and affirmations as soon as technologically practicable and no later than the end of the day on trade date. Or the entity can establish, maintain, and enforce written policies and procedures reasonably designed to ensure the completion of allocations, confirmations, and affirmations as soon as technologically practicable and no later than the end of the day on the date of the trade.

The commission adopted this rule to facilitate straight-through processing through new requirements applicable to clearing agencies like central matching service providers (CMSPs).

This rule has mandated CMSPs to submit an annual report via EDGAR to the Commission that describes:

(a) its current policies and procedures for facilitating straight-through processing;

(b) its progress in facilitating straight-through processing during the twelve months covered by the report; and

(c) the steps it intends to take to enable straight-through processing during the twelve-month period that follows the period covered by the report.

To comply with the mandate, CMSPs must use Inline XBRL tagging to improve accessibility and transparency of financial information in the annual reports filed with the SEC.

CMSPs must also provide annual reports in a single Inline XBRL document rather than a separate XBRL exhibit. Additionally, they must tag all financial information in the annual report, including the balance sheet, income statement, and cash flow statement. All notes to the financial statements, management’s discussion, and analysis section of the report must also be tagged.

This rule will come into effect 60 days after it is published in the Federal register. The compliance date for the rules is May 28, 2024.

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