The time it takes to settle equity and fixed income trades just got shorter.

The Securities and Exchange Commission (SEC) approved by unanimous vote to shorten the time it takes to process a trade down to two business days or T+2. The decrease in time is aimed to help reduce risk exposure to a variety of market forces – such as counterparty risk, credit risk and default risk.

Previously, trades were settled in three business days but in certain agreed instances, the settlement time frame could be longer or shorter depending on the trading partners. T+2 now standardizes the cycle. T+3 has been in effect for almost 15 years.

The settlement duration is defined as the time between when a trade is executed and cash/ownership of the security are transferred.

“It is finally time to say ‘hasta la vista’ to the antiquated T+3 settlement cycle,” acting SEC Chairman Michael Piwowar said.

Many global firms have already adopted the T+2 settlement cycle as it has been in effect in other countries.

SEC Commissioner Kara Stein expressed some support for shortening the cycle to one day, saying she believes technology exists to accomplish such a goal.

“I have asked the staff to study not only the changes resulting from a movement to a T+2 settlement cycle, but also to consider further improvements,” she said in a Reuters story.

T+2 will go into effect Sept. 5.

Exchange-traded funds are also now eligible for T+2 also.

Can T+1 or 0 be coming soon?

It could, but many industry members do not realize that achieving a shorter settlement windows, such as T+1 and T+0 are possible today using the technology already in place but with some limitations.

It’s an option for DTCC sell-side clients who utilize the National Securities Clearing Corp. (NSCC), and institutional customers who use Omgeo can agree to settle on a T+1 or a T+0 basis, according to Murray Pozmanter, managing director and head of clearing agency services at the DTCC.

If the NSCC processes a trade through the standard course of business, Depository Trust Company settles that trade the next day as part of the NSCC obligation.

On the other hand, if someone makes a cash trade before 11:30 a.m., the trade will make it into the DTCC’s Continuous Netting Settlement System for same day settlement.

“Some of the buy-side firms that we’ve heard from say that T+1 is as far as they would want go, but they have that capability today. If DTCC clients were interested in doing more T+0 trades or wanted to settle T+0 trades later in the day, beyond 11:30 am, that there’s no inherent limitation in doing that,” said Pozmanter. “The systems were configured this way based on what the industry needs were at the time.’

Also, some within the industry wonder if the move to T+2 or shorter should include disruptive technologies like distributed ledgers.

The DTCC has fielded such queries from buy- and sell-side clients, according to Pozmanter.

“A few companies have been talking about T+0 and T+1 settlement capabilities and I know that it has resulted in conversations with our customers,” he added.

Additionally, some have wondered if new technologies such as distributed ledger and other disruptive technologies aren’t needed to shrink the settlement window further or faster, said Pozmanter.

“We don’t envision any hiccups with going forward with the current target,” said Pozmanter. “The whole process seems to be moving along well. All the various industry participants are engaged, the regulators are engaged, and we don’t see any problem with the September date being in place.”