FINRA is requesting public comment on proposed amendments to its rules that are designed to support an industry wide effort to shorten the settlement cycle for securities in the U.S. secondary market by one business day. Under the proposal, the current settlement cycle of three days after the trade date would be shortened to two days after the trade date.
History of proposal. According to FINRA’s Regulatory Notice, the Depository Trust & Clearing Corporation (DTCC) published a formal recommendation to shorten the standard U.S. trade settlement cycle to T + 2 and announced that it would partner with market participants and industry organizations to devise the necessary approach and timelines to achieve T + 2.
Many in the industry have voiced support for the shortened settlement time, asserting that the shorter cycle will yield important benefits to the industry by promoting financial stability and significantly mitigating risks to the financial system.
FINRA is proposing definitional changes to its rules pertaining to securities settlement by, among other things, amending the definition of “regular way” settlement as occurring on T + 2. The proposed technical changes would implement the anticipated rule changes of the SEC and the other SROs. Accordingly, FINRA said that it believes that the proposed rule changes would not impose any burdens on the industry in addition to those necessary to implement the industry-wide initiative.
Benefits of the change. According to the Regulatory Notice, the DTCC study identified several anticipated benefits to the shortened settlement cycle. The change would align U.S. markets with other major global markets, including the European Union, that have already moved to T + 2; lessen member firm capital and margin requirements at the clearing agency by reducing risk exposure; reduce the additional margin and liquidity needs that can happen during times of economic volatility; and decrease counterparty risk by moving trades more quickly to settlement, enabling capital to be freed up faster for reinvestment and reducing credit and counterparty exposure.
Request for comment. FINRA specifically seeks comment on several specific questions:
- Would the proposed rule amendments have an effect on conduct that is required for compliance with any other FINRA rule?
- Are there any other FINRA Rules that should be amended to support the move to T + 2?
- Are there any economic impacts, including costs and benefits, to the industry that are associated specifically with FINRA’s proposed rule changes and are they in addition to those arising from the industry wide move to T + 2 and the SEC’s anticipated amendments to Exchange Act Rule 15c6-1?
- What economic impacts, including the costs and benefits, would accrue to investors as a result of FINRA’s proposed rule changes? What would be the magnitude and primary sources of these costs and benefits to investors? What factors or attributes would contribute to the costs borne by different segments of the public?
The proposed rule text of the impacted rules is attached to the Regulatory Notice. The comment period closes on April 4, 2016.