“Shortening the Settlement Cycle: Benefitting Everyday Investors” Prepared Remarks before the Accelerated Settlement in the U.K. Conference

Good afternoon. Thank you, Charlie, for the kind introduction. As is customary, I’d like to note that my views are my own as Chair of the Securities and Exchange Commission, and I am not speaking on behalf of my fellow Commissioners or the staff.

Last month, the U.S. smoothly shortened the settlement cycle for equities, corporate bonds, and municipal securities to one day after the transaction date (T+1). This step better unifies the U.S. market structure, where Treasuries, options, and mutual funds already largely settle in one day.

For everyday investors, this means you now can sell your stock on a Monday and get your cash on a Tuesday. This makes a real difference—you don’t have to wait until Wednesday. With 58 percent of American households holding stocks,[1] this is significant. This step also helped better unify the U.S. market structure, where Treasuries, options, and mutual funds already largely settle in one day.

Canada, Mexico, Argentina, and Jamaica successfully joined us in the move.

Importance of Shortening the Cycle

Time is money. Time is risk.

Thus, shortening the market plumbing of clearance and settlement saves money. It lowers risk. It increases efficiency, boosts liquidity, and promotes resiliency of the markets.

As I said, for everyday investors who sell their stock on a Monday, they will get their money on Tuesday.

For institutional investors, it will free up liquidity that might otherwise be trapped for two days.

Cutting the clearance and settlement cycle in half also reduces the amount of margin, or collateral, that must be placed with the clearinghouse. The way the math works it’s likely to average 29 percent savings over time. First indications reported by the clearinghouse show a savings of 25 percent, or more than $3 billion, resulting from the move to T+1.[2]

Shortening the matching parts of clearing (the time to ensure that all parties agree to the trade details) also lowers operational as well as counterparty risk. The sooner the parties have allocated, confirmed, and affirmed the trade information for their transaction, the lower the likelihood of a settlement failing since the parties have more time to identify and resolve any potential errors. The Bank of International Settlements (BIS) first recommended T+0 affirmations 22 years ago.[3] A decade later, CPMI-IOSCO reaffirmed this in their Principles for Financial Market Infrastructures.[4]

Shortening the cycle also means reducing the credit, market, and liquidity risks of the clearinghouse.

Lowering risks for market participants and clearinghouses, alike, reduces the likelihood that any one entity’s failure spreads risk to the financial system, making the system safer for everyone.

U.S. Memorial Day Transition

Many Americans were celebrating the unofficial start of summer over Memorial Day weekend as the U.K. was enjoying a spring bank holiday. Another important thing was happening. We were transitioning to T+1. Further, trades relating to initial public offerings were shortened from T+4 to T+2.

Following that weekend, brokers also were required to have policies and procedures reasonably designed to ensure completion of allocations, confirmations, and affirmations as soon as technologically practical. This is based on the new SEC rule[5] and in line with what BIS first recommended 22 years ago.

In addition, registered advisers are required to keep certain time-stamped records of allocations sent or received, confirmations received, and affirmations sent or received. 

Clearing agencies also are required to have policies and procedures to facilitate the straight-through processing of securities transactions, automating the entire trade process from execution to clearing and settling.

Key Takeaways

As you consider your own transition to T+1 in the U.K., I want to share some key takeaways from our experience.

It’s a Team Sport

First, transitioning to T+1 is a team sport. Thousands of market participants—from the clearinghouse, depositories, custodian banks, broker dealers, investment advisers, self-regulatory organizations, stock exchanges, service providers, and industry groups—worked, along with SEC staff, to make the transition happen smoothly.

It’s not only a team sport, it’s a global sport. By the way, speaking of global sports, good luck to England today in the Eurocup match.

The SEC staff engaged with market participants and regulatory counterparts around the world.

I want to thank everyone who had a role in making this smooth transition possible. Given the experience of moving from T+3 to T+2, we anticipated fail rates might go up following the transition to T+1. The data shows, though, that fail rates stayed relatively flat. For instance, the first day of T+1 settlement the fail rates went down modestly from May’s average.[6]

Importance of T+0 Allocations, Confirmations, and Affirmations

Second, I’d note how important it was that we included that allocations, confirmations, and affirmations must be completed as soon as technologically practicable, but at least on T+0. When we proposed the rule in February 2022, only 68 percent of transactions were being affirmed  on trade date.[7] By January 2024, this had increased slightly to 73 percent.[8] The clearinghouse publicly set a goal as part of the transition to move that up to at least 90 percent.[9] Given our rule as well as market participants’ efforts, by May 29, the day after the transition, the T+0 affirmation rate was up to approximately 95 percent at 9 p.m. ET, which is Depository Trust & Clearing Corporation’s (DTCC’s) new deadline.[10]

Importance of Setting a Firm Implementation Date

Third, I’d note how important it is just to set a date and, if possible, stick to it. It helps to organize everybody’s planning and implementation. No doubt, there will be some market participants who raise concerns with meeting whatever date you select. We benefited, though, from having an announced implementation date as well as a well-thought-out timeline and schedule.

The process from final rule adoption[11] to smooth implementation of T+1 in the U.S. was 15 months. The process from proposing the rule in February 2022 to implementation was 27 months. The transition happened smoothly within this time based upon all the efforts of market participants, the clearinghouse, and fellow regulators. In Canada it was 17 months from proposal to implementation.[12] In Mexico, it was just 10 months from when it was proposed in July 2023.[13] Argentina and Jamaica adopted their plans to transition but two weeks and one week respectively before implementation.

In the U.K., you will have to decide what policy and timing is right for you. I don’t suspect you will follow the timing of Argentina or Jamaica. I’d note, though, that if one looks at the 27 months it took the U.S. from proposal to implementation, your implementation might be June 2026. That’s 27 months from when you finalized your March 2024 “Accelerated Settlement Taskforce Report.”[14]

Some Business Models May Need to Shift

Fourth, though the transition to T+1 overall brings benefits to investors and the markets, it does come with transition costs as well as the need for various market participants to change business models.

For instance, international investors may need to shift their operations to cover their foreign currency risks on T+0 rather than possibly waiting for T+1. We saw a number of international investors actually moving some of their staff to the U.S. to accommodate the shift. We also found that time zones do matter, though you have the advantage that the U.S. already has gone to T+1.

Further, as it relates to mutual funds, including exchange-traded funds (ETFs), some market participants raised concerns about the potential mismatch between the timing of the redemption of such funds versus the settlement cycle of the underlying portfolio.

I’d note it’s not the first time we’ve had mismatches between the settlement cycle for funds and their underlying portfolios. In the United States, we’ve long had transactions in mutual funds generally settle in one day. In the U.K., you’ve also lived with such mismatches as the U.K. Gilt markets settle in one day.[15] Mutual funds and ETFs have used a variety of tools to address settlement time mismatches between fund shares and portfolio investments, including cash reserves, lines of credit, and interfund lending facilities.

A nice benefit of going to T+1 is in the area of corporate actions, in that ex-dividend dates and record dates now are aligned on the same day.

We Already Live in a World Where Settlement Cycles Are Not Aligned

Lastly, you undoubtedly will hear from market participants about settlement cycles not being aligned with other jurisdictions. The history of settlement cycles shows, however, that we have long experience with differences in settlement cycles both within jurisdictions as well as across jurisdictions. This history shows that market participants have found ways to handle this. For any market that shortens the settlement cycle, though, the benefits are real. Time is money, time is risk.

A bit of history might surprise some in the audience, but the U.S. stock market settled at T+1 well into the 1920s. It was only with increasing volumes that the market plumbing was lengthened to a business week after a transaction (T+5). We first shortened the cycle to T+3 in 1995,[16] followed by shortening it to T+2 in 2017.[17]

Ten years ago, you shortened to T+2 three years prior to us. In 2014, the European Commission required equity markets in 29 member countries (including the U.K. pre-Brexit) to move to T+2 settlement, joining Germany, Bulgaria, and Slovenia, which were already settling T+2.[18]

Israel moved to T+1 in 2012 for Tel Aviv Exchange’s clearinghouse member brokers’ equity trades. Broker-to-broker trades in corporate and government bonds also settle T+1.[19] India completed moving its equity markets to T+1 in January 2023.[20] Its sovereign debt has been T+1 since 2017.[21] In Japan, equities settle at T+2,[22] while government bonds settle at T+1.[23] China actually has moved to same-day securities delivery (within four hours after market close) for its A-shares securities,[24] though their related payments move in the banking system the next morning. In Hong Kong, settlement is T+2.[25]

Looking Forward

Looking forward, I want to raise three areas for further policy discussions.

First, as I look forward, I want to mention the Commission’s rules to facilitate additional central clearing for the U.S. Treasury market, which will be phased in over two years.[26] The final rules make changes to enhance customer clearing and broaden the scope of which transactions clearinghouse members must clear. These rules will help to make the Treasury market more efficient, competitive, and resilient.

 In just nine months, in March 2025, the separation of house and customer margin must be completed, ensuring that clearinghouses facilitate indirect participants as well. Starting at the end of 2025, certain cash transactions will have to be cleared. Starting in June 2026, certain repurchase agreement (repo) and reverse repo transactions must be cleared.

Second, looking forward, I think it’s appropriate for regulators and market participants around the globe to start to consider the possibility of shortening the settlement cycle for currency trading. Currency markets worldwide currently settle T+2. Particularly if Europe and the U.K. were to join the major markets of North America and Asia in moving to T+1, we should start to engage now in conversations, along with central banks, about the possibility of shortening the currency trading settlement cycle.

Third, some markets already have moved to settlement cycles on the day of the transaction. This includes parts of U.S. money markets, parts of the Chinese equity markets, and most recently India has proposed doing so in some equity markets.[27] Thus, looking forward, it raises the question as to whether further shortening beyond T+1 may be appropriate.

Conclusion

Let me conclude by once again saying why I think shortening the settlement cycle is so important. It helps everyday investors get their money sooner when they sell a security. It helps clearinghouse members lower their margin and free up liquidity. It helps the clearinghouse lower risk. Though it might just seem like the plumbing, it really does help the financial system and everyone who participates in it.

It took a team effort for a smooth transition in the U.S. as well as for our neighbors in the Americas. We look forward to continuing to work with you as you move toward giving everyday investors in the U.K. similar benefits.