Commissioner Aguilar Calls for Shortening the Securities Settlement Cycle in the Secondary Market

SEC Commissioner Luis A. Aguilar discussed the potential benefits of shortening the securities settlement cycle for the secondary securities market from three days to two days in a released SEC public statement.

These benefits included: (i) mitigating counterparty and other risks, (ii) lowering margin requirements for clearing agency members, (iii) reducing pro-cyclical margin and liquidity demands (especially during periods of market volatility) and (iv) bringing U.S. settlement procedures more in line with global standards.

The Commissioner noted that although such a transition would require fundamental changes across a wide number of industry practices, including those involving trade processing, asset servicing and documentation, he firmly believes a shortened market cycle “could profoundly enhance the health, robustness, and resiliency” of U.S. capital markets, particularly to deepen market liquidity.

Lofchie Comment: There appears to be broad consensus in the securities industry to make this change, subject to whether the technology is sufficient. Consideration should, however, also be given as to whether it would be necessary to continue to allow retail customers five days to make payments.