By Anne Sherry, J.D.
The Securities Industry and Financial Markets Association (SIFMA), the Investment Company Institute (ICI), and The Depository Trust & Clearing Corporation (DTCC) announced their plan to shorten the settlement cycle from trade date plus two days (T+2) to T+1 by the first half of 2024. The groups published a report for firms that includes considerations, recommendations, and next steps. They foresee lower risks and costs for the industry, building on the success of the move to T+2 in 2017.
In February 2021, DTCC published a white paper outlining the benefits of T+1 for the industry and investors. The industry then formed an Industry Steering Committee, which retained Deloitte & Touche to oversee sessions of an Industry Working Group with more than 800 participants from 160 organizations. DTCC President and CEO Michael Bodson said that the conversations arrived at “broad agreement on shortening the settlement cycle to T+1 to deliver significant capital efficiencies and risk mitigation benefits to the entire industry.” The working group discussed T+0 settlement but determined that this would fundamentally change post-trade processing and require the reworking of existing settlement systems, including eliminating batch processes.
The Industry Steering Committee recommends that firms begin to work with their counterparties, custodians, vendors, regulators, and clients towards the transition. The report finds that the 2024 target date will allow enough time for firms to assess the changes they need to undertake, as well as for the industry to conduct testing and for regulators to make necessary changes. It adds that “the industry has to embrace adoption of technology and software to achieve optimal settlements in a T+1 framework,” which will require thorough analysis.
Benefits and risks. According to the report, moving to T+1 will reduce risk, particularly in periods of high volume and volatility. It will reduce margin requirements, in turn allowing broker-dealers to better manage their capital and liquidity risks and use available capital. Capital and operational efficiencies from the move also include infrastructure modernization, standardization of industry processes, and cost reductions. However, the move also implicates some risks. The compressed time frame could lead to a lower percentage of prime brokerage trades affirmed for timely settlement through the National Securities Clearing Corporation’s Continuous Net Settlement (CNS) system. This, in turn, could cause an increase in fails to deliver. The report also recognizes that some equity and debt offerings settle later than the standard transaction settlement cycle, as permitted under exceptions found in Exchange Act Rule 15c6-1.
Areas of recommendation. The report includes specific recommendations on allocations and affirmations; trade documentation; global settlement and forex; corporate actions; prime brokerage; securities lending; settlement errors; ETF creation and redemption; equity and debt offerings; and conforming regulatory changes. It suggests the SEC change the deadline specified in its prime brokerage no-action letter for executing brokers to inform the prime broker of trade details to be consistent with T+1. The report also identifies a list of SEC, MSRB, FDIC, Fed, FINRA, and exchange rules that establish the current T+2 cycle and should be amended to conform to T+1. In the case of the SEC rules, this involves retaining the exceptions for certain equity and debt offerings, but where applicable, shortening the period to T+2.