Proposal aligns banks’ securities sales cycle with broader industry

Reducing the standard settlement cycle for securities purchased or sold by national banks and other financial institutions to two days, instead of three, has been proposed by the OCC and the FDIC in a joint notice of proposed rulemaking, published today.

In addition to national banks, the proposal (issued for a 30-day comment period) would affect securities sold or bought by federal savings and FDIC-supervised institutions.

In its notice, the two agencies asserted that the proposal is consistent with an industry-wide transition to a two-business-day settlement cycle. The agencies said the shorter cycle (cut down by one day) “is designed to reduce settlement exposure and align settlement practices across all market participants.”

Under existing rules, national banks generally may not effect or enter into a contract for the purchase or sale of a security that provides for payment of funds and delivery of securities later than the third business day after the date of the contract, unless otherwise expressly agreed to by the parties at the time of the transaction, the OCC/FDIC notice stated. The practice is known as “T+3”—shorthand for “trade date plus three days.”

The proposal, the agencies noted, is part of a larger, industry-wide shift to a two-day (T+2) settlement cycle that includes a “multi-year securities industry initiative and rule changes being implemented by other financial regulators and securities self-regulatory organizations.” The industry’s compliance date for this initiative is September 5, 2017, consistent with the compliance date for the Securities and Exchange Commission’s (“SEC”) T+2 rule, the agencies stated.

“The Agencies expect that most banks have already made substantial progress toward compliance with the T+2 settlement cycle,” the notice stated. “By aligning their settlement practices with those of their securities counterparties, banks’ transition to the T+2 settlement cycle will help mitigate operational risk and promote safety and soundness.”

Notice of proposed rule making: Securities transaction settlement cycle