The impact of accelerated settlement on the broad financial ecosystem was the topic of a recent FIS Global panel featuring John Abel, DTCC Executive Director, Settlement Services. Abel joined a distinguished panel of industry peers, including Tom Price, SIFMA Managing Director, Operations, Technology and BCP; Robert Walley, Principal, Deloitte & Touche LLP; and moderator, Susan Crozier, FIS Global Head of Regulatory and Industry Affairs.
A shortened settlement cycle of T+1 or even T0 has been discussed for years, since even before the industry moved from T+3 to T+2 in September 2017. However, DTCC’s recent white paper, “Advancing Together: Leading the Industry to Accelerated Settlement,” released in February 2021, has led to renewed interest, active dialogue and now the creation of industry working groups to discuss the impact and implications of an abbreviated settlement cycle on the financial ecosystem.
Journey to T+1
Market volatility in 2020 and the meme stock frenzy of early 2021 generated intense interest in the trade lifecycle from both Capitol Hill and regulatory agencies. Hearings by the U.S. House Financial Services Committee underscored the importance of shortening the settlement cycle.
Earlier this year, DTCC, ICI and SIFMA began an exploratory discovery process for T+1 with the ultimate goal to reduce risk, modernize systems as well as gaining operational and capital efficiencies.
Deloitte & Touche worked with the industry in 2017 to develop a roadmap to T+2 and is playing a similar role in the current process. An industry T+1 Steering Committee was formed to provide overall guidance and support to the effort. In addition, industry working groups with robust industry participation were formed to determine the impacts and challenges of shortening the settlement cycle. Walley commented, “With as many as 200 people participating on daily calls, this is more than just accelerating the cycle — it's about modernizing settlement functions both within the industry and within member firms.”
Challenges of a Shortened Cycle
In assessing the impact of shortening the cycle, the industry is looking at approximately 20 functional areas across six dimensions that include very specific functions, such as securities lending, prime brokerage and FX. Similar to the move to T+2, there is tremendous work, preparation and testing that need to be accomplished with a goal of full industry engagement.
While the move to T+1 generally entails changes to business processes, not necessarily changes in underlying technology, the compressed timeline presents unique opportunities for DTCC and the industry to reexamine the timing of end of day events. DTCC’s Institutional Trade Processing (ITP) business automates post-trade life cycle events between 6,000 financial services firms in 52 countries. Many of these critical trade functions, including allocations, confirmations and affirmations, begin after the end of the trading day. Ensuring there is ample time for these functions to occur before starting the next business day will impact the existing processing schedule.
Abel explained how DTCC’s current process begins after the trading day ends, which means all functions will need to happen between the end of the trading day and the beginning of DTCC’s night cycle. To accommodate the move to T+1, the industry has proposed moving processes to later in the day.
| New (T+1)
| DTC Night Cycle Begins
| 8:30PM S-1
| 11:30PM S-1
| Affirmation Cutoff
| DTC Output Available to Firms
|1:30AM Settlement Date
| In a move to T+1, Settlement Minus -1 will become the Trade Date
The time adjustments, while seemingly minor, may represent a substantial change and impact on certain members throughout the industry. Each component and function in the trade lifecycle may need to be reviewed holistically to understand the interdependency between the various components and potentially modified. Additionally, modifications need to be reviewed in the context of behavioral, technological and regulatory impacts. Automation can be leveraged to improve efficiency. Members are encouraged to review and leverage industry solutions, such as ITP’s Central Trade Matching platform, where available.
Another challenge facing the industry is the discussion of moving to night of trade settlement or even real-time gross settlement. While the technology is currently available to support for some products, and T+1 and T0 settlement is used today by DTC and NSCC for millions of transactions every day, it is not attainable for the entire industry.
Obstacles to a T0 settlement include funding with an FX conversion and securities lending. Price noted how the transition needs to be thorough, diligent and pragmatic with coordination of processes and behaviors of the buy and sell side. The industry’s primary goal is to create efficiencies without introducing any additional risk to markets.
Impact on Market Participants
The entire financial ecosystem will be impacted by the shortened cycle and participants agreed that the best way for firms to prepare is to be engaged. Abel added, “The industry working groups are key — there is tremendous engagement and dialogue as we work to understand challenges and craft solutions.”
While the move to T+1 is industry driven and not a regulatory mandate, DTCC, ICI and SIFMA have sought guidance from the regulatory agencies. Using the 2017 move as a roadmap, regulatory partners will need to identify all rules to be adjusted. Specifically, the working group has asked the SEC to review the 15c6-1 Rule, which adopted the T+2 settlement cycle. Other areas that will need regulatory review include securities lending, allocations and affirmations, client documentation (prospectuses), and the timing of confirmations under Rule 10b-10, which requires information to be delivered to customers at or before completion of the transaction.
Using Shortened Settlement to Achieve Greater Efficiencies
The U.S. securities industry is the most liquid market in the world, and any change must be made without introducing any additional risk to the system. By removing one day of the settlement cycle, there is a corresponding reduction in risk, leading to margin reduction and achieving greater capital efficiencies. There is also funding efficiency as investors will have quicker access to funds, processing efficiencies in the migration to industry standards, normalizing and creating more common data standards across the ecosystem, and using technology enablers that coordinate multiple market functions.
Abel summarized the discussion by noting, “Industry consensus has been that T+1 provides a host of benefits to the industry and is a manageable effort.”