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SEC Adopts Final Rules to Reduce Risk in Clearance and Settlement of Securities

The Securities and Exchange Commission (SEC) has recently adopted final rule changes regarding the clearance and settlement of securities (15 February 2023). The changes will impact the standard settlement cycle for most broker-dealer transactions in securities, shortening it from two business days after the trade date (T+2) to one business day after the trade date (T+1). The final rule changes will become effective 60 days after publication date in the Federal Register. The compliance date for the final rules is 28th May next year (2024).

We have summarized the key changes, what is required and next steps:

The SEC notes in a press release that the rules are designed to benefit investors and reduce the credit, market, and liquidity risks in securities transactions faced by market participants. The shortening of the settlement cycle from T+2 to T+1 will thus improve operational and capital efficiency, promote investor protection and greater liquidity in the markets.

In addition, the final rules will improve the processing of institutional trades by formally adopting the following requirement changes:

  1. A broker-dealer will now be required to enter into written agreements or enforce written policies and procedures to ensure allocations, confirmations, and affirmations are completed by no later than the end of trade date.
  2. Requirements for registered investment advisers will now involve keeping records of the allocations, confirmations, and affirmations for certain securities transactions.
  3. A new requirement for central matching service providers will be adopted to establish and enforce new policies and procedures to facilitate straight-through processing and will be required to submit an annual report to the Commission describing and quantifying progress with respect to this. Note that this applies to certain types of clearing agencies that provide central matching services.

The Catalyst Group’s Associate Director – Portfolio Services, Jared Jordan, commented:
“The final rule and the move to a T+1 cycle follows on from the change in 2017 when the cycle was shortened from T+3 to T+2, combined with the additional requirements pertaining to documented support, these updates represent a welcome step forward in the pursuit of efficiency.

Catalyst is able to adopt these regulatory changes to enable further improved efficiency in the processes.”

If you would like more information about the final rules, we recommend that you view the SEC Reducing Risk in Clearance and Settlement factsheet.

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