The U.S. Securities and Exchange Commission recently proposed rule changes to accelerate the settlement cycle to T+1. If the rule changes are adopted, a T+1 cycle for U.S. equities transactions could be implemented as soon as March 31, 2024.
To help firms plan and prepare for industry testing, which will begin at the end of 2022, DTCC has launched a series of virtual forums to help clients and the industry understand the impact of Accelerated Settlement and T+1 on specific market processes.
Related: Discover More from the Accelerating to T+1 Series
The first virtual forum featured a discussion on the status of the project, as well as the challenges and opportunities of accelerating to T+1. Moderated by David Kirby, DTCC Executive Director, Head of Americas Relationship Management, the panel of speakers included John Abel, DTCC Executive Director, Clearance & Settlement, Product Management; Joanne Kane, ICI Chief Industry Operations Officer; Tom Price, SIFMA Managing Director, Operations Technology & BCP; and Robert Walley, Deloitte Principal, Regulatory and Capital Markets.
Below is a summary of the discussion:
At a Glance
In February, the SEC proposed rule changes that would shorten the settlement cycle in the U.S. to T+1, requesting industry comments by mid-April. The industry is working collaboratively to respond to the SEC proposal including recommendations around reporting requirements, institutional trade processing, extended settlement for new capital markets and recommendations for a transition date. There is still much work to be done, however, the official move to T+1 will likely occur in early 2024.
Why Not Same-Day (T+0) Settlement?
Discussions around shortening the settlement cycle often turn to T+0. DTCC already has the capabilities to settle on T+0 and already clears and settles transactions on a same-day basis – with over 1 million same-day transactions processed each day, as requested.
DTCC is building and preparing for the move to T+1, with an eye toward T+0 in the future. However, moving to T+0 now would be a significant undertaking and involve immense changes to business processes impacting investors and products. T+0 may one day become an industry-wide standard, but significate analysis remains to determine the cost/benefit of such a move.
Real-time gross settlement (RTGS) differs from netted T+0 and given the volume of securities processed daily, and the financing and inventory management concerns, RTGS does not seem a feasible option for the industry.
Primary Benefits
The primary benefits of T+1 are risk reduction and capital efficiency gains.
- DTCC estimates a 41% reduction in the volatility component of the NSCC margin requirement, which can potentially result in billions of dollars of savings for member firms.
- There will be increased operational efficiency as firms adopt industry standards and solutions to modify their systems and processes to further develop automation and straight-through processing.
- Alignment of portfolio shares with the mutual funds that currently settle at T+1 will help with cash management.
Behavior Changes
In this condensed time frame, behavioral processes need to be updated. For example, today, the institutional trade affirmation process generally happens on T1, but this will have to move to trade date when the industry moves to T+1. Fundamental changes need to happen between counterparties, including moving away from manual processes like emails and faxes. Firms will need to move to automated solutions to align with the modernization of books and records.
Industry Impact
The industry is requesting to transition during Q2 2024 – similar to the 2017 move from T+3 to T+2 – over a three-day weekend, which will provide ample time for implementing system and process changes, testing and a cushion in the event of an issue.
Careful consideration needs to be taken so that no new operational risks are introduced when DTCC modifies its start-of-day processing schedule as these changes will affect the entire industry.
There will be impacts on foreign activity, but these are no insurmountable challenges. Many firms process T+1 fixed income and option transactions today for foreign clients. With 24 fewer hours to get foreign equity activity through the settlement process, firms will need to carefully review their current T+1 processes to ensure they can accommodate the increased volume related to U.S. equity activity. .
Next Steps
- Mid-2022: DTCC, ICI and SIFMA will publish the “T+1 Playbook” — an instruction manual for firms to prepare for T+1.
- Throughout 2022: Engage firms across the industry to ensure everyone is prepared. Begin impact analysis, secure budgets, and ensure vendors are prepared.
- 2023: Test processes, develop and build any system changes that need to be made. Remediation to resolve outstanding issues. Late in 2023 will be the industry’s “go / no-go” decision.
- 2024: Final testing and industry coordination. Go live.
