Wall Street watchdog shortens time-frame for stock trades, weighs new requirements for crypto investments

By Douglas Gillison and Chris Prentice

FILE PHOTO: People exit the headquarters of the U.S. Securities and Exchange Commission (SEC) in Washington, D.C.

© Thomson Reuters
FILE PHOTO: People exit the headquarters of the U.S. Securities and Exchange Commission (SEC) in Washington, D.C.

(Reuters) -Wall Street’s top regulator on Wednesday adopted rules tightening the time-frame for stock trades in an effort to tamp down the kind of risk seen in 2021’s GameStop fiasco, when retail investors suffered heavy losses.


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The U.S. Securities and Exchange Commission (SEC) was also considering whether to propose changing rules protecting client assets held by investment managers, in a move that would likely prevent cryptocurrency platforms from serving a key marketplace role.

In a 3-2 vote, the SEC opted to shorten the time between when a securities order is placed and when a trade concludes can lessen the kind of “systemic risk” spotlighted in early 2021 when the share price of the consumer electronics retailer GameStop Corp plummeted amid intense market volatility.

Trade groups have broadly welcomed the commission’s proposal to cut the so-called settlement cycle to a single business day from two, six years after an earlier SEC rule shortened the period from three days.

Market participants’ eagerness to move to the shorter settlement cycle “will help expedite the transition and overcome any obstacles,” such as expensive systems updates and industry-wide changes to processes, Cornell University Law Professor Birgitta Siegel said in a comment submitted to the SEC.

Industry players have complained, however, that the SEC was moving to require compliance too quickly. The new rule takes effect by May 28, 2024, earlier than they would like but later than the originally proposed effective date of Mar 31, 2024.

Republican Commissioners Hester Peirce and Mark Uyeda voted against the move, citing the insufficient transition period.

In a report on the events surrounding the GameStop trades of early 2021, SEC staff said the longer a trade remained unsettled, the greater the likelihood that a buyer or seller would default — by refusing to pay or to hand over shares sold.

Clearing houses often require trading platforms to offset such risks with high-dollar margin deposits, costs that can skyrocket during periods of volatility and market stress.

GameStop’s share price tanked after its earlier volatility resulted in a multi-billion-dollar margin call on trading platform operators such as Robinhood Markets Inc. Robinhood and others responded by blocking users from buying the stock.

A shorter settlement cycle should see fewer defaults and thus help cut margin deposit costs, thereby reducing the chances of such a scenario recurring, according to the SEC.


The commission was also weighing whether to propose new requirements for investment advisers, who can only maintain custody of client funds or securities if they meet requirements to protect the assets.

The SEC’s draft proposal would expand these requirements to any client assets, such as cryptocurrencies.

Advisers need to hold investors’ assets with a firm deemed to be a “qualified custodian.” The pending proposal would prevent many crypto platforms from serving as these custodians by requiring them to have independent audits and ensuring that clients’ assets are segregated and held in accounts to protect them in the event of a bankruptcy.

That would make it more difficult for hedge funds and private equity firms investing in digital assets on behalf of clients to work with crypto firms.

“Make no mistake. Based upon how crypto platforms generally operate, investment advisers cannot rely on them as qualified custodians,” SEC chair Gary Gensler said in a statement about the proposal.

(Reporting by Douglas Gillison; Editing by Megan Davies, Bradley Perrett and Nick Zieminski)