SEC opts for early move to T+1

This story has been updated to clarify the CCMA’s position.

The U.S. Securities and Exchange Commission (SEC) adopted a final rule Wednesday to shorten the settlement cycle from the current trade date plus two business days (T+2) to T+1.

However, while industry groups in both Canada and the U.S. had asked the SEC to schedule the transition to T+1 for the Labour Day weekend in 2024, the regulator instead opted for May 28, 2024 for the new rule to take effect.

The move to T+1 is intended to reduce settlement risk and enhance investor protection, while also enhancing operational and capital efficiency.

In a statement, U.S. industry trade group the Investment Company Institute (ICI) said that, while it was pleased with the planned move to T+1, it was disappointed with the timing.

“Not only would September 2024 greatly reduce the risk of any difficulties to the industry — especially smaller firms — in making the transition, it would also ensure that the United States will make the transition in coordination with Canada, which has already announced a compliance date of September 2024,” stated ICI president and CEO Eric Pan. “In our opinion, an extra three months would be a small price to pay for a smooth transition.”

The Canadian Capital Markets Association (CCMA) has also called on the SEC to opt for the Labour Day 2024 transition, but in a statement released Thursday, the organization said it would aim to go along with the SEC’s date.

“Market participants in both countries expect to adopt T+1 on the same day in 2024, as they did when the settlement cycle was shortened from T+3 to T+2 in 2017,” the organization said. “With 15 months remaining to complete this multi-party, globally-affecting change, the CCMA will continue engaging with stakeholders in Canada, the U.S., and other affected countries on multiple issues… As a result, resources will likely have to be adjusted due to the high importance of transitioning to T+1 on the same day as the U.S.”

The CCMA expressed its concerns in a letter to the SEC last week.

“We are concerned that an earlier date would mean significantly greater risks, for example, a material rise in failed trades, increased buy-ins, and higher collateral costs, for Canadian and American market participants,” the CCMA said in the letter.

“There is also the potential associated problems for those in the broader economy that rely on the smooth functioning of our markets,” the CCMA added — noting that the Labour Day weekend is the first shared long weekend for both the U.S. and Canada in 2024 after the first quarter.

“Based on the importance of the cross-border trade in interlisted securities, we continue to strongly recommend that the proposed compliance date be [Labour Day weekend 2024] as recommended by many market participants,” the CCMA said.

The urgency to shorten the settlement cycle was enhanced following the market disruptions that occurred after the onset of the pandemic in March 2020 — and again amid the 2021 “meme stock” surge in trading activity that the SEC said exposed “potential vulnerabilities in the U.S. securities market that shortening the standard settlement cycle and improving institutional trade processing can mitigate.”

“I support this rulemaking because it will reduce latency, lower risk, and promote efficiency as well as greater liquidity in the markets,” said Gary Gensler, chairman of the SEC, in a release.

“Today’s adoption addresses one of the four areas the staff recommended the commission address in response to the meme stock events of 2021. Taken together, these amendments will make our market plumbing more resilient, timely, orderly and efficient.”

In addition to shortening the settlement cycle, the final rules also aim to improve institutional trade processing and to facilitate straight-through processing.