Primary Market Transactions under the T+1 Shortened Settlement Cycle
Background
On May 28, 2024, the Securities and Exchange Commission (“SEC”) amendments to Rule 15c6-1(a) to shorten the standard settlement cycle for most broker-dealer securities transactions by one business day to “T+1” will become operative (with T being the transaction date). Since September 5, 2017, the standard settlement cycle for these transactions has been two business days, known as “T+2”. As a result, broker-dealers will be required to comply with the amended rule beginning on May 28, 2024 (so, trades subject to the standard settlement cycle made on Friday, May 24, 2024 and on Tuesday, May 28, 2024 will both settle on Wednesday, May 29,
2024).
As stated in the SEC’s rule, the T+1 requirement would not apply to certain categories of securities. In the case of firm commitment underwritten offerings, Rule 15c6-1(d) states:
“For purposes of paragraphs (a) and (c) of this section, the parties to a contract shall be deemed to have expressly agreed to an alternate date for payment of funds and delivery of securities at the time of the transaction for a contract for the sale for cash of securities pursuant to a firm commitment offering if the managing underwriter and the issuer have agreed to such date for all securities sold pursuant to such offering and the parties to the contract have not expressly agreed to another date for payment of funds and delivery of securities at the time of the transaction.”
In its February 15, 2023 adopting release, the SEC noted:
“…paragraph (d) enables underwriters and the parties to a transaction to agree, in advance of the transaction, to a settlement cycle other than the standard settlement cycle specified in either paragraph (a) or (c) of the rule, when necessary to manage obligations associated with the firm commitment offerings. Market participants involved in firm commitment offerings of certain debt and preferred securities commonly rely on paragraph (d) of Rule 15c6-1 to extend settlement in order to allow time for the completion of the extensive documentation associated with such offerings, and the Commission believes it is not always possible for such documentation to be completed within the time frames provided by under paragraphs (a) and (c) of Rule 15c6-1.”
In addition to adopting the new T+1 requirement, the SEC adopted new Rule 15c6-2, which requires broker-dealers to “…either enter into written agreements as specified in the rule or establish, maintain, and enforce written policies and procedures reasonably designed to address certain objectives related to completing allocations, confirmations, and affirmations as soon as technologically practicable and no later than the end of trade date.”
SIFMA also notes that on occasion, a non-U.S. company doing an equity capital market or debt capital market transaction with US Dollar proceeds may request that they receive net proceeds in their local currency. This may become more difficult to accomplish in a T+1 environment due to the need to conduct FX transaction(s) in addition to the equity or debt offering.
SIFMA, in consultation with its Primary Markets Committee, has outlined the following considerations relevant to primary market transactions under the T+1 shortened settlement cycle. Whether and to what extent any market participant takes these considerations into account is wholly voluntary and the parties to primary market transactions may, and should, decide for themselves how best to execute their transactions in compliance with the new rules.
Background
On May 28, 2024, the Securities and Exchange Commission (“SEC”) amendments to Rule 15c6-1(a) to shorten the standard settlement cycle for most broker-dealer securities transactions by one business day to “T+1” will become operative (with T being the transaction date). Since September 5, 2017, the standard settlement cycle for these transactions has been two business days, known as “T+2”. As a result, broker-dealers will be required to comply with the amended rule beginning on May 28, 2024 (so, trades subject to the standard settlement cycle made on Friday, May 24, 2024 and on Tuesday, May 28, 2024 will both settle on Wednesday, May 29,
2024).
As stated in the SEC’s rule, the T+1 requirement would not apply to certain categories of securities. In the case of firm commitment underwritten offerings, Rule 15c6-1(d) states:
“For purposes of paragraphs (a) and (c) of this section, the parties to a contract shall be deemed to have expressly agreed to an alternate date for payment of funds and delivery of securities at the time of the transaction for a contract for the sale for cash of securities pursuant to a firm commitment offering if the managing underwriter and the issuer have agreed to such date for all securities sold pursuant to such offering and the parties to the contract have not expressly agreed to another date for payment of funds and delivery of securities at the time of the transaction.”
In its February 15, 2023 adopting release, the SEC noted:
“…paragraph (d) enables underwriters and the parties to a transaction to agree, in advance of the transaction, to a settlement cycle other than the standard settlement cycle specified in either paragraph (a) or (c) of the rule, when necessary to manage obligations associated with the firm commitment offerings. Market participants involved in firm commitment offerings of certain debt and preferred securities commonly rely on paragraph (d) of Rule 15c6-1 to extend settlement in order to allow time for the completion of the extensive documentation associated with such offerings, and the Commission believes it is not always possible for such documentation to be completed within the time frames provided by under paragraphs (a) and (c) of Rule 15c6-1.”
In addition to adopting the new T+1 requirement, the SEC adopted new Rule 15c6-2, which requires broker-dealers to “…either enter into written agreements as specified in the rule or establish, maintain, and enforce written policies and procedures reasonably designed to address certain objectives related to completing allocations, confirmations, and affirmations as soon as technologically practicable and no later than the end of trade date.”
SIFMA also notes that on occasion, a non-U.S. company doing an equity capital market or debt capital market transaction with US Dollar proceeds may request that they receive net proceeds in their local currency. This may become more difficult to accomplish in a T+1 environment due to the need to conduct FX transaction(s) in addition to the equity or debt offering.
SIFMA, in consultation with its Primary Markets Committee, has outlined the following considerations relevant to primary market transactions under the T+1 shortened settlement cycle. Whether and to what extent any market participant takes these considerations into account is wholly voluntary and the parties to primary market transactions may, and should, decide for themselves how best to execute their transactions in compliance with the new rules.