The SEC adopted the rule to shorten the settlement cycle to T+1, effective May 28, 2024, for all U.S. securities transactions that settle through DTC. Canada has adopted a parallel rule covering their markets, however, given the three-day Memorial Day holiday in the United States, Canadian securities will begin trading using a T+1 settlement date on May 27th, one day before U.S. securities. What impact will this have on the post-trade processing of securities transitions?
Related: Here's the top 5 things firms need to do for T+1
Michele Hillery, DTCC General Manager of Equity Clearing and DTC Settlement Service, and David Kirby, Securities Practice Head, DTCC Consulting Services, participated in the Market Evolution Update: The Road to U.S. T+1 Settlement webinar to discuss the impacts of the move — both inside and outside the United States. Hosted by Emmanuelle Riess, U.S. Custody Product Manager for Securities Services, BNP Paribas, Hillery and Kirby were joined by Laurent De Lattre, Head of MFS Americas and Global Head of FX for Securities Services, BNP Paribas, and Yasha Shetty Head of Global Settlements and Cash, BNP Paribas.
Highlights from the discussion are summarized below:
Increased global scope: With the shortened settlement cycle, allocation and confirmation must happen on trade date, impacting all institutional trades that clear and settle through DTCC’s various services. The new guideline of 7:00 PM ET for allocations and 9:00 PM ET cutoff for straight through processing of affirmations on trade date puts added pressure on global investors to ensure the proper processes are in place. Firms — investment managers, broker-dealers, custodians — will need to consider their target operating model. Asia now has one day to reconcile, but after the move, that will be reduced to as little as two hours, depending on market.
Higher Costs Due to Delays: Unlike the CSDR regime, there will be no regulatory penalties in place if trades are not affirmed on T and do not settle on T+1. However, missing the affirmation cutoff of 9:00 PM will trigger semi-automated, or even manual, processes on the broker/dealers and custodians and decrease straight-through-processing (STP). The decline in STP, as well as increased costs per transaction outside of the affirmation process, will contribute to the overall impact of inefficient processes.
Preparedness Considerations: The move to T+1 will require system, operational and behavioral changes. A 1Q survey with The ValueExchange showed that only 41% of industry participants have yet to start looking at T+1, and on the buy side, the number climbs to 61%. By removing a full day from the settlement cycle, counterparty preparedness may be an in-scope firm’s single biggest risk. Firms are only as strong as their weakest counterparty — if your counterparty is not prepared, it will hamper your ability to settle in a T+1 environment.
Health Assessment: DTCC performed a T+1 “health assessment” to examine all systems, their interconnectedness, and how they connect both upstream and downstream – both now, and in the compressed timeframe. This extensive holistic review yielded opportunities for areas of investment to improve, and firms are encouraged to do the same. Extensive exercises evaluated every part of DTCC’s process and how a break would impact markets. Hillery commented that firms’ testing should ideally include tests that intentionally run through scenarios where there are breaks in the system to test recoverability and resiliency.
T+1 Testing Timeline: DTCC is providing a T+1 testing environment for nine months prior to implementation, beginning August 14. The test cycles will run biweekly, allowing firms to test formally, through scripted testing, or informally, for ad hoc scenarios. The repeating cycle allows retesting of scenarios to ensure all situations can be addressed. Testing forums are available to guide firms through the testing process.
Automation is Key: DTCC’s Institutional Trade Processing (ITP) continues to remove friction in the post-trade space. Initiatives include enhancing clients' use of ITP’s products and creating more streamlined and automated processes, including CTM’s Match to Instruct (M2i) workflow, and ALERT®, key enablers to achieving T+1 settlement. DTCC also offers services to help clients assess, including impact assessments ahead of T+1.
The compression of times will require proper inventory management, and the reconciliation process is vital as firms will need to know where their shares are. DTCC is committed and available for whatever help is needed — to find all documentation around testing, firms should visit ust1.org to leverage and assess their systems. Kirby reiterated the message, “Firms should do everything to get ready now.”