The SEC has finalized rules that will further shorten the settlement process for security transactions from two business days to trade date (T+2) to (T+1). A previous change from T+3 to T+2 took place in 2017.
The rulemaking is intended to promote greater investor protection, reduce risk, and increase market efficiency. This change will reduce the risk of counterparties failing to meet obligations by decreasing the span of time after the trade where prices can fluctuate, which may affect the cost for market participants. The final rules will also include improvements to the processing of institutional trades. These improvements will require investment advisors to keep records of allocations, confirms, and affirms for transactions as well as adding new requirements for central matching providers meant to help facilitate straight-through processing.
With these final rules set to be published on May 28 of 2024 firms will need to be prepared to update their tech infrastructure and operational processes to remain in compliance. This shortening of the trade cycle may cause a larger impact than previous changes from T+3 and T+4 because T+1 settlement will require overnight affirmation. This 24-hour settlement window does not leave much time for manual operations which may have been used in previous transitions. Firms who get a head start and put the investment in streamlining operations for accelerated settlement will set themselves ahead in an evolving market landscape.
This rulemaking reflects the increasing efficiency of markets and the need for comprehensive trading technology. With settlement cycles having compressed all the way from 14-day time spans back when electronic matching engines were first introduced, today’s technology has made security transactions faster than ever. With continued innovation being inevitable we may even see T+0 settlement, real-time settlement, and so firms must stay vigilant and agile in their implementation of effective systems and processes.