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Digital Subscriptions > The Hedge Fund Journal > Issue 122 - May 2017 > SEC Approves T+2 Settlement

SEC Approves T+2 Settlement

Standard settlement cycle shortened

ELLIOTT R. CURZON, K. SUSAN GRAFTON, NATHANIEL T. DREYFUSS, DECHERT LLP

The US Securities and Exchange Commission (SEC) on March 22, 2017 adopted amendments to Rule 15c6- 1(a) under the Securities Exchange Act of 1934 (Exchange Act), to shorten the standard settlement cycle for securities transactions by broker-dealers from three business days after the trade date (T+3) to two business days following the trade date (T+2).1 The amendments are a response to changes in markets, technology, operations and infrastructure since the T+3 requirement was put in place in 1993. The amendments are intended both to reduce credit, market and liquidity risk (thereby reducing systemic risks) and to encourage technological development (to further reduce settlement times in the future). The amendments become effective May 30, 2017, with a compliance date for broker-dealers of September 5, 2017.

Background

The process of modern clearance and settlement has its roots in the so-called “paperwork crisis” of the late 1960’s,2 to which the industry and Congress responded with a series of measures designed to eliminate problems that had caused the crisis and reduce risks in the settlement process.

The industry responded with increased automation and computerization as well as the 1973 creation of the Depository Trust Corporation (DTC), which provides: centralized, electronic recordkeeping; trading of uncertificated securities; and book-entry clearance and settlement. Congress acted to supervise and regulate the clearance and settlement process in 1975 amendments to the Exchange Act (1975 Amendments), providing the SEC with oversight and regulatory authority over clearance and settlement entities and mandating the establishment of a national clearance and settlement system. The National Securities Clearing Corporation (NSCC), established in 1976 as a result, acts as the central counterparty (CCP) for most securities transactions. Together, DTC and NSCC form the main infrastructure for US securities market clearance, counterparty and settlement systems, and eliminate many of the problems that led to the paperwork crisis.

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Informing the Hedge Fund Community. With access to some of the industry’s biggest names and an astute and talented group of writers and contributors, The Hedge Fund Journal has established itself as a trusted source of information on the hedge fund industry.
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