Shortening the Settlement Cycle

In 2017, broker-dealers will be required to devote significant time and attention to preparing for a shortened settlement cycle.  As a means of reducing credit risk, counterparty risk and overall systemic risk, the Securities and Exchange Commission (SEC) has moved forward with proposed rules that would amend Rule 15c6-1(a) in order to reduce the settlement cycle to two business days (T+2).

Currently, Rule 15c6-1(a) generally prohibits broker-dealers from effecting or entering into a contract for the purchase or sale of a security (other than certain exempt securities) that provides for payment of funds and delivery of securities later than the third business day after the date of the contract unless otherwise expressly agreed to by the parties at the time of the transaction.  Commenters generally have been supportive of the move to a shortened settlement cycle, as well as of the SEC’s proposed amendments to rule 15c6-1(a), while noting that the SEC will need to address other rules and practices.  For example, commenters cited the need to address Reg SHO, securities lending transactions, certain prime broker practices, and prospectus delivery practices.  In addition, other SROs and the banking agencies will need to consider amendments to certain of their rules and regulations.  In the fall, the New York Stock Exchange filed with the SEC its proposed changes to various NYSE rules in order to address a shortened settlement cycle.  More recently, in December, FINRA filed with the SEC proposed amendments to address the shortened settlement cycle.  The FINRA amendments would address Rule 2341, Rule 11140, Rule 11150, Rule 11210, Rule 11320, Rule 11620, Rule 11810, and Rule 11860.

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