SEC To Float T+1 Conversion Proposal

The Securities and Exchange Commission plans to issue a rule-change proposal for public comment, which, if subsequently approved by the commission, would require that securities transactions in the United States move to a T+1 settlement environment.

The plan was announced at the Securities Industry Association's STP/T+1 Settlement Spring Conference in New York by Deputy Director of the SEC's Division of Market Regulation Robert Colby.

T+1, the model for settling trades the day after they are executed, has been a topic of debate in the securities industry for years, with some arguing that the conversion is necessary to handle growing trade volumes and reduce risk, and others, especially those on the buy side, contending that the cost/benefit equation doesn't warrant the necessary work. Currently trades must be settled within three days of execution.

At the SIA Operations Conference, which took place from May 7-10 in Palm Springs, Calif., Don Kittell, SIA executive vice president, gave a T+1overview, which consisted mainly of raising questions about the viability of a T+1 conversion in the current market environment. At the SIA's T+1 conference (May 20- 21, New York) Kittell once again spoke of re-evaluating T+1 but emphasized that he was not suggesting that the initiative be tabled.

The SIA, he says, plans to discuss the T+1 issue and come out with some decisions at its July 18 board meeting. At that meeting, a T+1 cost/benefit analysis, more reflective of the current market conditions, will be evaluated.

"I suspect that the revised business case will show that (T+1 is still warranted)," says the SEC's Colby.

But regardless, Colby says that the SEC might come out with its T+1 rule proposal before the July 18 meeting, though he speculated that it would probably not be issued until after that date, due to the SEC's heavy workload.

Colby says that the main goal of the rule proposal will be to gather comments from all industry segments, especially smaller players in the investment-management space. He also says that a mandated T+1 conversion is likely the only way the industry will get to a straight-through-processing environment.

"I don't understand how STP would happen on its own, without this additional driver," he says.

The proposal, says Colby, which could be out for comment for approximately three months, will likely come out this summer and support the current conversion date of June 2005. Colby says that a more theoretical concept release would probably not be necessary because so much debate has taken place on the topic already. "A rule proposal is more concrete and will catalyze the discussion, so you get more focused comments," he says.