SEC Shortens Trade Settlement To 2 Days

Time between exchange of cash and security gets cut by a day.

Reviewed by: Sarah N. Lynch
Edited by: Sarah N. Lynch

Washington (Reuters) – U.S. securities regulators moved on Wednesday to modernize regulations that require stock and bond trades to settle within three business days, a step the industry has urged the government to take for years.

The Securities and Exchange Commission voted unanimously to shorten that time frame to two business days, a change that aims to reduce credit and market risk, including the risk of a trading counterparty defaulting.

3-Day Rule Since 1933

Modern technology lets investors make trades in a matter of milliseconds.

But since 1993, the SEC's rules have required brokers to wait for three business days between the time an investor's order is executed, to when the cash and ownership of the security are exchanged.

"It is finally time to say hasta la vista to the antiquated T+3 settlement cycle," acting SEC Chairman Michael Piwowar said.

The shortened cycle, he added, will reduce "the time horizon for risk exposures" and also "should improve capital efficiency and enhance the resilience of the national clearance and settlement system."

Decreased Counterparty Risk

Wall Street trade groups have said the change would decrease counterparty risks, bolster financial stability and align with many other international markets that have already adopted a two-day securities settlement cycle.

Consumer groups also support the change, although some have said the settlement time should be reduced even further, to just one day.

Democratic SEC Commissioner Kara Stein expressed some support on Wednesday for shortening the cycle to one day, saying she believes technology exists to accomplish such a goal.

"I have asked the staff to study not only the changes resulting from a movement to a T+2 settlement cycle, but also to consider further improvements," she said.

The new two-day settlement time is slated to take effect on Sept. 5.

Besides applying to stocks and bonds, the change will also apply to exchange-traded funds, certain mutual funds, municipal securities and limited partnerships that trade on exchanges.