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Wall Street Adopts Faster Trade Settlements

Stock trading in the U.S. is moving to a shorter settlement process that regulators hope will reduce risk and improve efficiency in the world's biggest capital market.

Effective today (May 28), investors in U.S. equities, bonds, and other securities must settle their transactions one business day after the trade instead of two days as was the case previously.

The rule change is being enforced by the U.S. Securities and Exchange Commission (SEC) that is tasked with regulating Wall Street and protecting investors.

To comply with the rule change in the U.S., Canada sped up its market transactions a day earlier (May 27), switching to one-day settlements.

The changeover in Canada went smoothly, according to the Canadian Capital Markets Association.

The United Kingdom isn’t expected to make the switch to one-day trade settlements until 2027, and Europe is considering the change. In India and China, faster settlement is already in place.

The SEC decided to make the change to one-day settlements following the 2021 meme stock frenzy, which highlighted the need to improve capital efficiency and liquidity in securities transactions.

Settlement is the process of transferring securities or funds from one party to another after a trade has been agreed upon. It takes place after clearing and is handled by the Depository Trust Company (DTC).

“Shortening the settlement cycle will help the markets because time is money and time is risk,” said SEC Chair Gary Gensler in a written statement.

Some market analysts are warning that the changeover could lead to near-term volatility as trading firms now have less time to secure money to buy stocks, recall shares out on loan, or fix transaction errors.

Trades fail when a buyer or seller do not meet their trading obligation by the settlement date, which could lead to losses, penalties, and damaged reputations.

Market participants, such as banks, asset managers and regulators, worked over the Memorial Day long weekend to ensure a smooth switch, according to media reports.