On June 1, 2018, the OCC and FDIC issued a final rule shortening the settlement cycle for securities transactions effected by OCC- and FDIC-regulated institutions. Under the final rule, all such banks will be required to adhere to the standard industry settlement cycle, which currently requires trades to be settled no later than the second business day after the trade date (T+2).
As of September 5, 2017, non-bank market participants in the United States have been subject to a T+2 settlement cycle under SEC, MSRB, FINRA, NYSE, NASDAQ, Options Clearing Corporation, and DTCC rules. The OCC’s and FDIC’s rules, however, had permitted banks under those agencies’ jurisdiction to settle securities on a T+3 basis, which was the prior market convention. (By contrast, the Federal Reserve’s corresponding regulation for state member banks incorporates the market-standard settlement cycle.)
To address this potential fragmentation, in the summer of 2017 the OCC and FDIC issued guidance indicating that banks should be prepared to settle securities transactions on a T+2 basis. In September 2017, the agencies followed their guidance by proposing changes to their rules to require settlement no later than the second business day following the date of the trade, unless otherwise agreed to by the parties at the time of the transaction.
The final rule, however, requires OCC- and FDIC-regulated institutions to settle securities transactions no later than the number of business days in the standard settlement cycle followed by registered broker-dealers in the United States following the date of the trade, unless otherwise agreed to by the parties at the time of the transaction. Under the final rule, the length of the standard settlement cycle is determined by reference to SEC Rule 15c6-1.
The change to a cross-reference approach in the final rule is notable because it means that if and when the SEC amends Rule 15c6-1 to require T+1 settlement in the future, the OCC and FDIC would not need to amend their regulations further to require T+1 settlement. Instead, OCC- and FDIC-regulated banks would be subject to the T+1 settlement requirement automatically.
The final rule will be effective as of the first day of the calendar quarter beginning at least 30 days following the rule’s publication in the Federal Register, which is expected to be October 1, 2018.