The Securities and Exchange Commission recommended a new rule on Wednesday that would reduce the settlement period for securities trading from two to one day in an attempt to tackle market infrastructure issues highlighted by last year's "meme" stock trading frenzy.
The move was debated at an open meeting, with the SEC's current four-member slate agreeing on the benefits of switching to a so-called T+1 settlement cycle, in which broker-dealers make sure that buyers and sellers in a stock deal acquire their shares and payment one business day after the transaction has occurred.
"If approved, I believe [the adjustment] will reduce risk to the financial system and increase market efficiency," SEC Chairman Gary Gensler noted on Wednesday.
The idea has been pitched before, but it gained traction last winter after extreme retail investor involvement in certain short-sold stocks, such as GameStop Corp. and AMC Entertainment Holdings Inc., sparked a stock trading spike that prompted popular brokerages like Robinhood Markets Inc. to limit sales of those stocks.
Gensler stated Wednesday that he "share[s] the displeasure of investors who were kept out of making specific trades" in response to the event.
The DTCC Recommends Reducing The Settlement Period From 2 Days to 1
According to the company, the purchase restriction was placed on Robinhood by an affiliate of the Depository Trust and Clearing Corp., which handles clearing and settlement operations for U.S. equities in reaction to unusual market volatility.
Last February, the brokerage's CEO, Vlad Tenev, told Congress that the present two-day settlement cycle was to blame for the high margins and that real-time settlements, in which deals are completed instantly, were the way to go.
Not shortly after Tenev's congressional testimony, the DTCC issued its report, recommending that the typical settlement cycle be reduced from two to one day to decrease market risks and slash margin requirements.
The Securities and Exchange Commission proposed modifications on Wednesday that would accomplish precisely that, requiring broker-dealers to comply with the T+1 settlement cycle by April 2024.
According to the proposal, the agency is also looking for input on how "to best move beyond T+1."
"Same-day settlement may not offer sufficient advantages to the market to justify the considerable implementation costs and a potential rise in operational and other risks," Commissioner Hester Peirce stated on Wednesday.
According to Gensler, the amendment proposal urges broker-dealers and investment advisors to guarantee that stock trading data essential for settling transactions is confirmed and confirmed "as soon as technologically practical" on the day of the trade.
Central matching services providers, which handle deals between broker-dealers and banks, also require the plan to promote automated transaction processing that does not require manual intervention for their institutional investor clientele "Straight-through processing" is a term used in the business to describe this type of intervention.
"Eliminating the use of equipment that encourage or need manual processing is a good idea.
In addition to the continuous development and implementation of increasingly efficient automated systems, it is critical to reducing risk and costs to ensure the timely and efficient processing of institutional trading transactions.
Securities transactions must be cleared and settled accurately. "The proposed revisions would be accessible for public discussion for 60 days, according to the proposal announced Wednesday. On Wednesday, the commissioners stated that they are eager to evaluate the remarks to reduce trade settlement delays even more.
Commissioner Allison Herren Lee said in prepared remarks, "I'm confident that when corporations evaluate new technology investments, they will do so with a lens toward greater risk reduction and efficiency gains in the settlement processes."
Rep. Patrick McHenry, R-N.C., the ranking member of the House Financial Services Committee who has championed Republican scrutiny of the SEC's stated objectives and activities throughout the Biden administration, praised the SEC's plan.
On Wednesday, McHenry took a break from that campaign, saying that the planned settlement time decrease was "welcome news."
"It has become evident that reducing the settlement cycle is in everyone's benefit," McHenry said in a statement following the committee's study into the January 2021 meme stock incidents. "It's refreshing to see the SEC take this approach rather than overregulate in a way that restricts options for average investors."
After joining Sen. Pat Toomey, R-Pa., in criticizing Gensler last month for "unreasonably short comment periods," McHenry welcomed the proposed amendment's 60-day comment period.
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