On January 25, 2024, Securities and Exchange Commission (SEC) Chair Gary Gensler delivered a speech highlighting the significance of shortening the settlement cycle in financial markets. In his address, Chair Gensler emphasized the impact of this move on market efficiency, risk reduction, and investor benefits.
The GameStop Events: A Reminder of Market Plumbing
Chair Gensler began by referencing the GameStop events that took place three years ago when the rapid rise in stock prices led to brokerages restricting buying activity. This resulted from clearinghouses making larger-than-usual margin calls, causing everyday investors to lose access to the market. This incident underscored the importance of efficient market plumbing.
Importance of Clearing and Settling
Clearinghouses play a crucial role in market plumbing, acting as intermediaries between buyers and sellers. They mitigate risks among counterparties and provide netting, reducing overall margin requirements. Additionally, they enforce robust rules for margin collection and risk management.
The Need for Shortening the Cycle
Chair Gensler stressed that time is money and time is risk. Shortening the settlement cycle saves money, reduces risk, enhances efficiency, boosts liquidity, and ensures market resilience. Investors benefit from quicker access to their funds, while institutional players can free up trapped liquidity from unsettled trades.
SEC’s Rule Changes and Impact
The SEC has adopted rules to cut the settlement cycle from T+2 (trade date plus two days) to T+1 in the U.S. starting on May 28, 2024. This change aims to unify market structure, benefit investors, and reduce margin requirements. Initial public offering settlements will also be shortened from T+4 to T+2.
Additional Requirements
The SEC’s updated rules will require brokers to implement policies ensuring prompt allocation, confirmation, and affirmation of trades. Registered advisers must keep time-stamped records, and clearing agencies must streamline the entire trade process.
Settlement Cycles Around the World
Chair Gensler provided a global perspective on settlement cycles, noting that various countries have adopted T+1 or same-day settlement cycles for different financial instruments. This transition has been gradual but continues to emphasize the importance of time in financial markets.
Looking Ahead
Chair Gensler concluded by raising four areas for further policy discussions. First, he encouraged other nations to consider shortening their settlement cycles. Second, he mentioned the SEC’s rules to enhance central clearing for the U.S. Treasury market. Third, he suggested exploring the possibility of shortening the settlement cycle for currency trading. Finally, he raised the question of whether further shortening beyond T+1 may be appropriate.
Conclusion
Chair Gensler’s speech underscores the critical importance of shortening the settlement cycle in financial markets. The move towards T+1 settlement in the U.S. and other countries reflects a commitment to efficiency, risk reduction, and investor protection.