Trades on the U.S. stock market will now settle in one business day, the fastest in a century, with the adoption of a new Securities and Exchange Commission rule Tuesday.
The new settlement system, known as T+1, has been slated to start May 28 since the SEC approved it in February 2023. It hastens the time between trade and settlement from two business days, the standard since 2017.
“For everyday investors who sell their stock on a Monday, shortening the settlement cycle will allow them to get their money on Tuesday. Shortening the settlement cycle also will help the markets because time is money and time is risk. It will make our market plumbing more resilient, timely, and orderly,” said SEC Chair Gary Gensler in a May 21 statement.
The new SEC rules also establish new processing and recordkeeping requirements from broker-dealers and registered investment advisers.
Affected transactions include stocks, bonds, exchange-traded funds, municipal securities, certain mutual funds and limited partnerships that trade on an exchange.
Similar transitions have happened before, including in 2017 and in 1993, when the settlement system moved from T+3 to T+2. In the 1920s, trades settled in just one business day, but then had to be pushed out as far as five days because it wasn’t possible at the time to keep up with explosive trading activity, according to Bloomberg.
“While previous transitions were successful, transition to a shorter settlement cycle may lead to a short-term uptick in settlement fails and challenges to a small segment of market participants,” the SEC wrote in its memo last week. “Despite such expected issues, the SEC has seen with each transition that shortening the settlement cycle benefits investors and reduces the credit, market, and liquidity risks in securities transactions faced by market participants.”
The Securities Industry and Financial Markets Association, a large finance industry trade group, has created what it’s dubbing the T+1 Command Center, aimed to usher industry personnel through issues they might face with the change in settlement, including on Wednesday’s so-called “double-settlement day” – when Friday’s T+2 transactions come due concurrently with Tuesday’s T+1 transactions.
“There’s a lot of dependencies within the industry and there may be some rough patches with individual firms,” SIFMA Managing Director Tom Price told Bloomberg. “But I’m encouraged that firms are staffing up. They’re making sure folks are not at the beach over the transition period but in the office.”
The transition to T+1 settlement was spurred by the GameStop meme rally of 2021, according to Gensler and SEC Commissioner Caroline Crenshaw.
“It has now been over two years since GameStop and other ‘meme’ stocks brought market structure into the spotlight,” Crenshaw said when the rule was passed last year. “While the events of January 2021 are no longer front-page news, the issues that they highlighted related to market structure and retail investing are still front of mind for the SEC.”
The change in settlement time also occurred in Canada and Mexico on Monday.
