The time it takes to settle equity and fixed income trades just got shorter.
The Securities and Exchange Commission (SEC) approved by unanimous vote to shorten the time it takes to process a trade down to two business days or T+2. The decrease in time is aimed to help reduce risk exposure to a variety of market forces – such as counterparty risk, credit risk and default risk.
Previously, trades were settled in three business days but in certain agreed instances, the settlement time frame could be longer or shorter depending on the trading partners. T+2 now standardizes the cycle. T+3 has been in effect for almost 15 years.
The settlement duration is defined as the time between when a trade is executed and cash/ownership of the security are transferred.
“It is finally time to say hasta la vista to the antiquated T+3 settlement cycle,” acting SEC Chairman Michael Piwowar said.
Many global firms have already adopted the T+2 settlement cycle as it has been in effect in other countries.
According to a report on Reuters, SEC Commissioner Kara Stein expressed some support on Wednesday for shortening the cycle to one day, saying she believes technology exists to accomplish such a goal.
“I have asked the staff to study not only the changes resulting from a movement to a T+2 settlement cycle, but also to consider further improvements,” she said in a Reuters story.
T+2 will go into effect Sept. 5.
Exchange-traded funds are also now eligible for T+2 also.
