SEC Adopts T+1 Settlement Cycle

In addition to shortening the settlement cycle, the rules will improve the processing of institutional trades, regulator says.



The Securities and Exchange Commission had adopted a new rule aimed at shortening trade settlement cycle for most broker-dealer transactions, in an effort to avoid crises like the one caused by 2021’s meme stock trading.

“I support this rulemaking because it will reduce latency, lower risk, and promote efficiency as well as greater liquidity in the markets,” said SEC Chair Gary Gensler in a statement after the Wednesday vote. “Taken together, these amendments will make our market plumbing more resilient, timely, orderly, and efficient.”

The new rule that has been adopted will reduce the settlement cycle for securities transactions from two days to one.

Jessica Wachter, the SEC’s chief economist and director of the division of economic and risk analysis, explained during Wednesday’s hearing that the time between the execution of a trade and when it is considered final, known as the settlement cycle, can pose certain risks to market actors. Those risks can include a substantial market price change in the asset or that one of the parties will fail to fulfill its obligations. Reducing the cycle to one day is intended to reduce these risks.

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SEC Commissioner Caroline Crenshaw, who voted to adopt the rule, explained in her statement that the shortened cycle “should reduce the number of outstanding unsettled trades, reduce clearing agency margin requirements, and allow investors quicker access to their securities and funds. Longer settlement periods, on the other hand, are associated with increased counterparty default risk, market risk, liquidity risk, credit risk, and overall systemic risk.”

Commissioner Jaime Lizárraga connected the rule change to January 2021 price volatility caused by “meme stocks,” which resulted in multiple class action lawsuits.

“The Commission has taken various actions to prevent another meme stock-type event from impacting the markets, including the recently proposed equity market structure reforms that address, among other things, best execution for retail investors,” Lizárraga said in a statement. “Shortening the settlement cycle to T+1 complements these reforms and helps mitigate some of the risks that drove stock price volatility and significant margin calls during the meme stock event.”

The rule was adopted by a 3-2 vote. Commissioners Hester Peirce and Mark Uyeda asked that the Commission postpone the compliance date to September 3, 2024 from May 28, 2024. This would allow more time for compliance and would also match the compliance date of a similar rule in Canada. The Investment Adviser Association supported the later compliance date in an emailed statement, citing the Canadian rule. Uyeda also expressed concern that a shortened cycle would leave less time to correct errors.

Despite those objections, the rule was adopted with a compliance date of May 28, 2024.

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CalPERS Equity Portfolio Edges Out S&P 500 Returns in Q4 2022

CalPERS’ equity portfolio returned 7.92% in the fourth quarter of 2022, eclipsing the S&P 500 performance by 84 basis points.

 

The California Public Employees’ Retirement System’s public equity portfolio eked up to an assessed value of more than $117 billion in the fourth quarter of 2022,  according to its most recent 13F-HR filing.

The $439 billion pension system saw the value of its public equity portfolio reported on the form, dated December 31, 2022, though not indicative of raw performance data, drop 21.5% from the same 13F-HR filing one year prior.

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According to CIO reporting in July 2022, CalPERS updated its asset allocation to consist of 105%, indicative of an additional 5% reserved for leverage. The plan’s asset allocation target is 42% in global equity, 30% in fixed income, 15% in real assets, 13% in private equity and 5% in private debt, with additional 5% allocation consisting of leveraged debt equity. The allocation target shake-up saw the target allocation of global equities within the pension’s portfolio fall by 8%; while adding 5% to private equity, 2% to fixed income, and 2% to real assets

Like the New York State Teachers’ Retirement System, CalPERS was a beneficiary of the private takeover of Twitter completed by Elon Musk in the Q4 2022. If the pension system held all its shares tallied in the Q3 filing to the completion of the deal, the pension would have netted $91 million to reallocate within the portfolio.

In addition, the U.S.’s -largest public pension fund, made a huge trade in offloading 1.932 million shares of Walmart during the quarter, raising more than $275 million. The pension seemed to trim its positioning in the retail sector, selling more than 20% of its shares in Gap Inc, Target, American Eagle Outfitters and Walmart during the quarter.

In originating new equity positions during the quarter , the pension created new positions of at least $1 million in the equities of U-Haul Holdings, MasterBrand Inc, Atlassian, RXO Inc and BioHaven Ltd. The filing also shows that CalPERS allocated to Sector SPDR ETFs, in the financial, technology, materials and health care sectors; positioning, approximately $50 million each into the materials and healthcare ETFs, $143 million into the technology fund, and $530 million into the financial fund. 

The largest five positions of the public equity portfolio at the end of the fourth quarter were Apple (4.8%), Microsoft (4.2%), Johnson & Johnson (1.7%), Amazon (1.65%) and Berkshire Hathaway Class B (1.4%), differing substantially from the makeup one earlier, when the five largest positions were Microsoft (4.15%), Apple (4%), Amazon (2.5%), Vanguard Index S&P 500 ETF (2.45%) and iShares Core S&P 500 ETF, (2.15%).

The only shake-up in the top five quarter-end positions of the public equity portfolio from the end of the third quarter to the end of the fourth quarter was Berkshire Hathaway replacing Tesla. The carmaker lost immense equity value in Q4 during the private takeover of Twitter by Musk, who is also Tesla’s CEO, which ironically aided the CalPERS portfolio in freeing up capital


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CalPERS Blames ‘Tumultuous’ Markets for Preliminary 6.1% Fiscal Year Loss

CalPERS’ New Asset Allocation Kicks In July 1

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