SEC Finalizes Rules to Reduce Risks in Clearance and Settlement

Following a consultation primarily aimed at reducing the settlement cycle for securities transactions and making other amendments to facilitate faster, more efficient transaction processing in February 2022 (please see EventID 14577 for more information in this context), the U.S. Securities and Exchange Commission (SEC) has now published its finalized rulemaking in this matter. In an accompanying press statement, the SEC’s Chairman Gary Gensler notes that this final rulemaking will contribute to „reduce latency, lower risk, and promote efficiency as well as greater liquidity in the markets“. Indeed, the final rulemaking will reduce market, liquidity, and credit risk alike which shall help dampen any effects from sudden market movements as occurred in 2021.
To recall, in its consultation, the SEC sought to implement new requirements upon broker-dealers and central matching service providers (CMSPs) to
(1) reduce the time between the execution of a securities transaction and its settlement from currently T+2 to T+1;
(2) eliminate the separate clearing cycle for firm commitment offerings in underwriting activities priced after 4:30 p.m. and subject those to the regular clearing obligations (T+1);
(3) reduce the time between execution and allocation, confirmation, and affirmation for institutional trades; and
(4) require CMSPs to „facilitate straight-through processing“.
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In its final rulemaking now the SEC basically goes forward as proposed with one key change which is also described in more detail below. Specifically, the Commission imposes the following new requirements upon broker-dealers:
1. Broker-dealers may only enter or effect securities transactions whose payment and final delivery of affected securities – settlement – take place within 24 hours following execution (T+1). This requirement does not need to be met, if the parties to the transaction have agreed on other settlement terms.
2. Broker-dealers may only enter or effect transactions relating to firm commitment offerings in underwriting activities that are priced after 4:30 p.m., if settlement can take place within two days following execution, unless the parties to the transactions have agreed otherwise. In this matter, the SEC has extended the settlement cycle to provide more flexibility in case of „unanticipated issues“ in connection with a firm commitment offering such as guarantee issues or issues regarding transfer agents.
3. Where transactions must be allocated, confirmed, or affirmed, e.g. in cases of investment fund orders and transactions, broker-dealers must either have policies and procedures in place to ensure that such processes can be completed „as soon as technologically practicable“, but no later than the end of the trade date or must enter into written agreements with their clients to ascertain such completion within same timeframe.
4. Those brokers opting for the first alternative must adhere to stringent documentation and operational requirements as specified in the final rule.
Additionally, fund managers or other financial market participants that have entered into agreements with broker-dealers for purposes of allocating, affirming, and confirming trades as described under (3.) will now be required to keep record of corresponding notifications sent to or received by broker-dealers. And finally, clearing agencies that are central matching service providers must now establish processes and procedures that „facilitate straight-through processing“ and describe in an annual report their current procedures, progress, and the steps they intend to take to facilitate straight-through processing of institutional trades.
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As the above summary only briefly describes the final rule amendments, please consult the original document for more detailed, comprehensive information.