Legal News: Shortened Settlement Cycle for Securities Transactions

By Eric Peters, Fall 2017 IAC Student Intern

Effective September 5, 2017, the SEC has amended Rule 15c6-1 of the Exchange Act to shorten the standard settlement cycle for broker-dealer transactions by one day.  These broker-dealer transactions are called “settlements,” defined as the official transfer of securities to the buyer’s account in exchange for cash to the seller’s account when a security is bought or sold.  The time period between the transaction date (when the sale took place) and the settlement date (when the sale was effectuated) is called the “settlement cycle.”

Prior to this amendment, the required settlement cycle for securities transactions, subject to certain exceptions, was three business days, typically denoted as “T + 3.”  This meant, for example, that if you sold shares of stock on Monday, the transaction would settle by Thursday.

New Settlement Cycle Period Effective September 5th, 2017

The new settlement cycle for securities transactions is two business days, typically denoted as “T + 2.”  This means, for example, that if you sold shares of stock on Monday, the transaction would settle on Wednesday.  The new “T + 2” settlement cycle applies to the same securities transactions as the old, “T + 3” settlement cycle.  The types of securities covered include: stocks, bonds, municipal securities, exchange-traded funds, certain mutual funds, and limited partnerships that trade on an exchange.  If you are unsure of whether a particular security is covered under the new amendment, check with your broker.

Finally, since this new amendment requires the transaction to close a day earlier, both the seller and buyer must either deliver the security or make a payment a day sooner.  Specifically, if you or your broker-dealer hold a securities certificate, you or the broker-dealer may need to deliver it a day earlier to ensure that the transaction goes through within this shorter, required settlement cycle period.  On the other hand, if you are buying securities, you may need to pay for them one business day earlier.  If you have a margin account, you should consult your broker regarding the impact on your margin agreement.

For more details on the new amendment, go to https://www.sec.gov/rules/final/2017/34-80295.pdf.