SEC Announces New One-Day Settlement Cycle for Transactions

Settlement Cycle to Shorten: What It Means for Investors

by Faruk Imamovic
SEC Announces New One-Day Settlement Cycle for Transactions
© Getty Images/Spencer Platt

Starting next Tuesday, the timeline for settling stock transactions will become significantly faster. Currently, broker-dealer transactions follow a "T+2" standard, meaning it takes two business days for a transaction to settle. However, beginning May 28, the settlement cycle will shorten to just one business day, referred to as "T+1." While this change aims to streamline the trading process, it may initially cause some turbulence in the market.

"For everyday investors who sell their stock on a Monday, shortening the settlement cycle will allow them to get their money on Tuesday," Gary Gensler, chair of the Securities and Exchange Commission (SEC), said in a press release. "It will make our market plumbing more resilient, timely and orderly."

The Mechanics of the Change

This adjustment in the settlement cycle will affect a broad range of financial instruments, including stocks, bonds, municipal securities, exchange-traded funds (ETFs), some mutual funds, and limited partnerships trading on an exchange. Additionally, broker-dealers and registered investment advisors must adhere to new recordkeeping rules.

Proponents of the T+1 settlement cycle argue that it will enhance liquidity in the market and reduce the volatility of margins—the collateral traders must provide to ensure transactions proceed smoothly. Clearinghouses, which act as intermediaries between buyers and sellers, collect these margins as proof of the traders' financial capacity to complete the transactions.

"Assuming everything goes well and we don’t see any hiccups, the move towards T+1 will be an overall benefit to our ecosystem, institutional investors, and retail investors," said Rich Lee from Baird.

To prepare for this transition, Baird has established a T+1 committee since last summer. This committee has been actively engaging with clients to guide them through the changes and has increased staff to manage the accelerated clearing process.

Historical Context: The 2021 Meme Stock Frenzy

The push for a shorter settlement cycle partially stems from the 2021 meme stock phenomenon, where Reddit-fueled trading led to dramatic price surges in stocks like GameStop and AMC Entertainment. During this period, platforms like Robinhood temporarily halted buying of these stocks, citing the T+2 rule's impact on collateral requirements. This suspension left investors frustrated, waiting for their trades to settle and brokers unable to facilitate further purchases due to the cash being tied up until the transactions completed.

"The existing two-day period to settle trades exposes investors and the industry to unnecessary risk and is ripe for change," Robinhood CEO Vlad Tenev said in a February 2021 release. "There is no reason why the greatest financial system the world has ever seen cannot settle trades in real time."

SEC Announces New One-Day Settlement Cycle for Transactions
SEC Announces New One-Day Settlement Cycle for Transactions© Getty Images/Spencer Platt

Boeing's Quality Control Challenges

In a separate but equally significant development, Boeing is set to present a plan to the Federal Aviation Administration (FAA) addressing quality control issues in its assembly line. This follows an incident where a hole appeared in the side of an airborne 737 Max, prompting an FAA audit that revealed multiple compliance failures.

Boeing CFO Brian West emphasized the collaborative nature of the discussions with the FAA, noting that the upcoming plan submission is just the beginning of a lengthy process to restore confidence in Boeing's production quality.

"We have frustrated and disappointed our customers because of some of the production supply chain issues that we’re up against," West said. "And while I understand that frustration, the most important thing we can do for our customers and the supply chain in this industry is to focus on the actions that are underway as we speak."

Meta's AI Advisory Council Faces Criticism

Meanwhile, Meta has appointed a new advisory group to guide its artificial intelligence strategy. Composed entirely of White men, the group's lack of diversity has sparked criticism. The council includes notable figures such as Patrick Collison, co-founder and CEO of Stripe, and Nat Friedman, former CEO of GitHub. Despite their impressive credentials, the absence of women and people of color raises concerns about inclusivity in AI development.

Experts argue that diverse perspectives are crucial, especially as AI technologies influence many aspects of life and have the potential to perpetuate existing biases on a larger scale. Joy Buolamwini, founder of the Algorithmic Justice League, highlighted the importance of inclusive oversight in AI systems to ensure equitable opportunities and prevent harm to marginalized communities.

These developments in the financial, aviation, and tech sectors underscore the ongoing efforts to enhance efficiency, safety, and inclusivity. The transition to a T+1 settlement cycle aims to make trading quicker and more resilient, though it may face initial challenges. Boeing's commitment to improving quality control reflects the critical importance of safety in aviation. Meta's advisory council appointment has sparked a necessary dialogue about diversity in tech leadership, emphasizing the need for varied perspectives in shaping the future of AI.