Good morning. I would like to thank staff in both Trading and
Markets and DERA for their hard work on this proposal to shorten the
settlement cycle for securities transactions. In particular, I
would like to thank Jeffrey Mooney, Susan Petersen, Natasha Greiner,
Charles Lin, and Narahari Phatak.
The clearance and settlement process has evolved dramatically over
the past several decades. It used to be dependent on "runners" or
messengers who would deliver orders and paper stock certificates by hand
between brokerage firms. As our capital markets grew, so did the
amount of paperwork involved. The manual processes and paperwork
associated with securities transactions ultimately became untenable and
led to the so-called "Paperwork Crisis."
[1]
Congress responded in 1975, asking the Commission to establish a
national system for the clearance and settlement of transactions.
Congress also directed the Commission to create the rules governing
market participants involved in the clearance and settlement
process.
Today's third release seeks to update a rule that was created in
1993, which specifies how quickly securities must settle after the trade
date.
[2] The proposal would shorten the time to transfer and pay for securities after a trade from three days to two.
The proposed rule should reduce risks faced by market participants,
whether retail or institutional investors, broker-dealers, custodial
banks, central clearing parties, or systemically important financial
market utilities ("FMUs"). As we saw during the 2008 financial
crisis, longer settlement periods are associated with increased
counterparty default risk, market risk, liquidity risk, credit risk and
overall systemic risk.
[3]
Just a one day change will help mitigate the risks of an
unnecessarily long settlement cycle that have persisted despite rapid
improvements in technology.
[4]
A shorter settlement time also should make the market more
efficient. Moreover, given the advances in computer hardware and
software already in use by market participants,
[5] the move to T+2 is not only possible, but also should lay the groundwork for an even shorter settlement cycle.
[6]
Undoubtedly, reducing the settlement cycle will involve changes and
costs. Additionally, market participants will need to consider
how reduced settlement cycles fit within the larger clearance and
settlement ecosystem, and the possible impact on payment systems as a
whole. I invite commenters to also weigh in on their experiences
in foreign jurisdictions, which have already transitioned to a shorter
settlement cycle.
[7]
Finally, I would like to thank Commissioner Piwowar for all his work on this issue.
[8]
I look forward to receiving everyone's best thoughts and comments on this proposal.
Thank you.
[1] See e.g.,
U.S. Securities and Exchange Commission, Study of Unsafe and Unsound
Practices of Brokers and Dealers, H.R. Doc. No. 231, 92d Cong., 1st
Sess. 13 (1971).
[2] See
Securities Transactions Settlement, Exchange Act Release No. 33023 (Oct.
7, 1993), 58 FR 52891. Prior to the Commission's adoption of
Securities Exchange Act Rule 15c6-1 in 1993, market custom and practice
was to settle securities transactions within five business days of a
trade ("T+5"). The Commission adopted the trade date plus three
rule ("T+3") in 1993, thus formalizing a shorter settlement cycle.
At that time, the Commission noted the benefits of shortening the
settlement cycle, which included reducing credit and market risk
exposure to unsettled trades, reducing liquidity risk and encouraging
greater efficiencies in clearance and settlement in order to facilitate a
reduction in systemic risk for the US markets. The Commission
contemplated further reductions in the settlement cycle in 2004.
See also, Securities Transactions Settlements, Exchange Act Release No. 49405 (Mar. 18, 2004), 69 FR 12922.
[3] See e.g., Omgeo, "
The Road to Shorter Settlement Cycles: Creating a Trade Date Environment in the US and Across Global Markets" (Mar. 2013),
available at https://www.omgeo.com/ssc
(noting generally that the crisis highlighted how a three day
settlement period can create substantial systemic risk in times of
extreme market volatility and uncertainty).
[4] The term
"settlement cycle" generally refers to the time between when a trade is
made and the time the buyer must make payment and the seller must
deliver the security.
[5] See, e.g., Amendment to Securities Transaction
Settlement Cycle, Exchange Act Release No. 34-78962 (Sept. 28, 2016)
(the "Proposed Rule") at pages 131-132 (noting that overall costs
associated with a transition may be lower given that some entities may
be able to repurpose existing systems).
[6] Id. at
63. (citing statistics from the Depositary Trust & Clearing
Corporation, or DTCC, which indicate that on average, 45% of trades are
affirmed on the trade date or "T" while 90% are affirmed on T+1, and 92%
are affirmed by noon on T+2);
see also, "The
Recommendation of the Investor Advisory Committee: Shortening the Trade
Settlement Cycle in U.S. Financial Markets" (Feb. 12, 2015) available at
https://www.sec.gov/spotlight/investor-advisory-committee-2012/settlement-cycle-recommendation-final.pdf
(recommending the Commission consider the implementation of a T+1
settlement period at least for US equities and other US securities as
soon as possible).
[7] See European Central Securities Depositories Association, "A very smooth transition to T+2" (Oct. 2014), available at
http://ecsda.eu/archives/3793 (discussing the European markets transition from T+3 to T+2 settlement cycle).