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SEC Cuts Time for Settlement Cycle

Finance and Securities

“NYC NYSE” by Arnoldius, licensed under CC Attribution Share Alike 3.0 Unported. Modified by Guzov, LLC.

The Securities and Exchange Commission (SEC) has issued a landmark decision, which will transform the efficiency of buying and selling securities. At the end of March, the Securities and Exchange Commission (SEC) agreed to amend Rule 15c6-1(a) of the Securities and Exchange Act 1934 to limit the timeframe to settle broker-dealer securities transactions from three business days to two. The rule will officially be in force on September 5, 2017. The SEC says this decision will “enhance efficiency, reduce risk, and ensure a coordinated and expeditious transition by market participants”.  This will allow exchanges to be quicker, which will serve the interest of investors because there is a risk within the space of three days of the deal not going through.

This rule will ensure that once the investor buys or sells a security, the brokerage firm will have a maximum of two days to receive or deliver the payment. This will encompass all transactions related to stocks, bonds, municipal securities, exchange-traded funds, specific mutual funds, and limited partnerships. The three day rule has been stagnant since 1993 when the SEC shortened the timeframe from five days — a time where technology was not fast or efficient. The amendment is a promising step from the SEC to evolve in light of today’s new technology, which our economy is becoming increasingly reliant on.  According to the Securities Industry and Financial Markets Association, 6.8 billion shares are traded every day and in 2015, the “securities industry raised $2.3 trillion of capital for businesses.” This reform will have a huge impact on the stock market and economy. However, the SEC is late to the game as other international markets have already implemented the low risk two day regulation.

SEC Chairman Michael Piwowar asserts that the “SEC remains committed to ensuring that U.S. securities regulation is reflective of modern times, and in shortening the settlement cycle by one day we aim to increase efficiency and reduce risk for market participants.” However, although this is a big step for the SEC, the Commission   continues to be reluctant to permit bitcoin exchanges. Last week the SEC rejected for the second time a request to list and trade bitcoin due to bitcoin’s lack of regulation. The SEC earlier refused a request from the Winklevoss brothers to list Bitcoin ETF and secondly dismissed Intercontinental Exchange Inc’s NYSE Arca to list SolidX Bitcoin Trust. Bitcoin has reached $1,300, bypassing the price for an ounce of gold. Large companies, financial institutions and growing financial technology start-ups are increasingly making the case that bitcoin and a digitalized economy are our inevitable future. It is interesting that the SEC is so reluctant to approve of a decision to list and trade bitcoin, although as we have previously discussed, a company using blockchain technology and bitcoin could technically register as an exchange, Alternative Trading System, or broker/dealer to meet the SEC’s regulations.

Although this rule does not need to be implemented until September, investors, companies and brokerage firms are already preparing for this change. The SEC may not reform as quickly as investors would like, but at least this two day amendment will have positive impacts on the U.S. stock market.

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