New SEC rule to hasten securities trade settlement

Impatient stock traders have been heard.

The Securities and Exchange Commission changed its rules last week to require brokerage firms to cut the number of days to settle stock and bond trades from a maximum of three days to two days, a move to reduce market risk and harmonize standards with other nations.

The rule, which will go into effect on Sept. 5, applies mostly to stocks, fixed income securities and investment trusts. Currently, securities firms that trade on behalf of individual and institutional investors have up to three days to issue sales proceeds to sellers and deliver purchased securities to buyers.

Many firms often settle trades before the 3-day deadline. But the brokerage and fund industries worked with regulators to implement the change as a way to cut down on transaction defaults and other risk factors.

"They are going to get things done quicker, which is a benefit to consumers," says Marty Burns, chief industry operations officer of the Investment Company Institute, a trade group of investment companies. "Anytime you have to wait, there's risk of it not happening."

U.S. government securities, such as Treasury bonds and T-bills, are not part of the rule change since they're settled in one day.

Meanwhile, other international markets, including Europe, already operate on a two-day settlement cycle, and the change is also meant to help American firms comply better with varying standards. All North America firms will make the change on Sept. 5.

The SEC last updated the standard settlement cycle in the 1990s, when it was shortened to three days from five. But financial technology used in trading and sending payments has improved dramatically and trading volumes continue to grow.

The 3-day cycle is "no longer serving the best interests of the American people,” SEC Acting Chairman Michael Piwowar said in a statement. "The SEC remains committed to ensuring that U.S. securities regulation is reflective of modern times."

"While a shorter settlement time may seem like a simple technical change, it’s actually a massive undertaking that will meaningfully benefit investors," says Tom Price, managing director at the Securities Industry and Financial Markets Association (SIFMA).

Firms have made "significant investments" to implement the change and are conducing tests to be ready, Price says.

More than $270 billion dollars in equities, on average, were traded in the U.S. stock exchanges every trading day, or an average of over 6.8 billion shares per trading day, according to SIFMA.

​Follow USA TODAY reporter Roger Yu on Twitter @ByRogerYu.