Tightened Time Frame for Securities Trading Aims to Reduce Defaults

Article excerpt

IT'S countdown time on Wall Street: Starting June 7, investors in the United States will have a much shorter time frame in which to come up with the money to pay for their securities transactions. That also means investors who sell securities will get paid faster.

The change in the clearance and settlement cycle for securities transactions -- dubbed "T+3" -- was initiated by the US Securities and Exchange Commission (SEC).

Under the rule, whenever any person or institution buys a security, the payment on the transaction must be received by the brokerage firm no later than three business days after the trade is executed -- thus, T+3. Under existing SEC rules, the payment can be received up to five business days later.

Similarly, when a person or institution sells securities, the brokerage firm must now receive the securities certificates no later than three business days after the sale was authorized, a change from the current five-day window.

The new rule will apply to stocks, corporate and municipal bonds, and mutual-fund shares.

According to an SEC spokesman, the agency wants to foster greater liquidity in financial markets, increase efficiency, and curb volatility.

Mainly, experts say, federal regulators want to end the defaults that exacerbated the stock-market crash back in October 1987, when a number of parties defaulted on paying for trades on futures markets and the stock market.

The new rule is expected to lead to fundamental changes in the way individual investors buy and sell securities.

"Under the current {five-day} system, there is inherent risk for financial markets," says Hans Stoll, director of the Financial Markets Research Center at Vanderbilt University in Nashville. "Cutting the clearance and settlement time down to three days provides greater safety for financial markets," Mr. Stoll says.

Currently, he notes, futures markets have a tight settlement period: T+1. That is, the investor must have the payment to the broker on a futures transaction by 10 a.m. the next morning. …