The Securities and Exchange Commission will be requiring a T+1 settlement cycle on May 28. This means that broker/dealers will have to settle securities transactions in one business day as opposed to the two required under current rules. The rule was finalized in February 2023 but does not take effect until next week.
The SEC has argued that reducing the settlement cycle will reduce risk for investors by reducing the risk of prices changing during the transaction period and by increasing liquidity by reducing the amount of time that their trade position is open and the amount of time their funds are tied up in a transaction. The SEC cited the market volatility during the Covid pandemic and the 2021’s meme stock markets as inspiration for the rule change.
Jessica Wachter, the SEC’s chief economist and director of the division of economic and risk analysis, said when the rule was finalized that a two-day settlement cycle presents greater price change risk to market participants as well the risk that one of the transacting parties will fail to fulfill its obligations.
SEC Chairman Gary Gensler said the of the rule that “I support this rulemaking because it will reduce latency, lower risk, and promote efficiency as well as greater liquidity in the markets.” Stephane Ritz, a managing principal and T+1 lead at global management and technology consultant Capco, says that mutual funds are outside the scope of the rule because they are normally settled on the same day as the order, as are Treasurys. The SEC has identified most other securities, such as stocks, bonds and municipal securities, as falling under the scope of the rule.
Ritz notes that the accelerated settlement cycle can affect the rebalancing of an index within a mutual fund, but this would have little noticeable impact on investors.
The main party affected by the change will be foreign investors that rely on foreign exchange to execute trades. Ritz says that such investors will have to execute foreign exchange trades on “T+2” or two days ahead of when they would like to purchase a security in dollars. Ritz expects that anticipating a transaction and buying or selling foreign currencies ahead of time will be the preferred strategy for this class of investor, and “timing will be very relevant,” Ritz says.
Tags: Mutual Fund, SEC, Settlement