The U.S. Securities and Exchange Commission (SEC) 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 in 2024.
To help firms plan and prepare for the move to a T+1 Settlement Cycle, DTCC has launched a series of virtual forums to help clients and the industry understand some of the potential impacts of the transition to a T+1 Settlement Cycle on specific DTCC processes.
Related: Discover More from the Accelerating to T+1 Series
The last installment of DTCC’s five-part “Accelerating to T+1” series, held on June 14, kicked off with an explanation of the impact moving to T+1 will have on securities lending, prime brokers and exchange-traded funds (ETFs) with Robert Cavallo, DTCC Director, Clearance and Settlement Product Management and Bill Kapogiannis, DTCC Executive Director, Equities Clearing Services. The segment wrapped up with a panel discussion among industry experts to discuss their overall readiness and how their firms have prepared.
Below are highlights from the event:
Prime Brokers Transactions
The affirmation cutoff time for these transactions is being moved to TD at 9PM from its current cutoff of SD-1 at 11:30AM cutoff. All Prime Broker Transactions that are affirmed by the 9PM on T cutoff and meet NSCCs CNS eligibility criteria will be sent from ITP to NSCC for processing through NSCCs CNS service.
Disaffirmation Process
Today a PB can disaffirm for an account and its transactions up to 5PM on SD-1, with the move to a T1SC the disaffirmation time will change to T+1 at 5PM which will still allow the needed time for PBs to disaffirm transactions.
How the disaffirmation process will work:
- Disaffirmations between 9:00PM on T to 1:30PM on T+1 would result in reversal transactions being generated for same day settlement. If the original PB transaction is unsettled, the disaffirmation will net against the original transaction. If the original PB transaction is settled, the disaffirmation will result in new NSCC positions to be settled. Both scenarios could impact both the PB and EB NSCC intraday margin requirements and could result in intraday margin calls.
- Disaffirmations between 1:31PM on T+1 to 5:00PM. would result in reversal transactions being generated for the next day settlement day (S+1). Similar to above, if the original PB transaction is unsettled, the disaffirmation will net against the original transaction. If the original PB transaction is settled, the disaffirmation will result in new NSCC positions to be settled. Both scenarios will impact both the PB and EB settlement day +1 NSCC margin requirement.
Optional Service
DTCC is discussing adding an optional service where participants can elect to have their unaffirmed Institutional and Prime Broker transactions sent from ITP to DTC along with their affirmed transactions that are Non PB for processing through DTCs ID ANE process. These transactions will be subject to the same authorization and exemption cutoff of 10:45PM on T. DTCC is awaiting further guidance from the SEC regarding their rule proposal that would require affirmation by the end of the day and what will that does that mean for the industry and DTCC before we will make a final decision on this service on development of this service.
Securities Lending: Addressing Potential Issues
Modifications to processes, technology and behaviors will be necessary to avoid an increase in potential settlement fails. The industry working group suggests changing the current recall industry best practice recall time to accommodate for the move to a T+1 settlement cycle to avoid the potential for an increase in settlement fails. In addition, firms and their service providers should think about what changes could be made to improve their contract compare and corporate action process.
SFT Clearing
NSCC has just launched a new service called the NSCC Security Financing Service or SFT for short which can be a valuable tool to address some of the concerns that the T1 SL IWG raised in the Stock Loan space. Here a few of the benefits of participating in this service and the benefits to firms in a T+1 settlement cycle:
The Securities Financing Transaction (SFT) Clearing service, is a National Securities Clearing Corporation (NSCC) product offering central clearing and settlement services for overnight borrows and loans of equity securities (collectively “SFTs”). To this end, the SFT Clearing service was just launched this month and it:
- Supports central clearing of clients’ equity SFTs intermediated by Sponsoring Members or Agent Clearing Members.
- Supports central clearing of equity SFTs between NSCC full-service members submitted by Matched Trade Submitters.
- Maximizes capital efficiency and mitigates systemic risk by introducing more membership and cleared transaction opportunities for market participants.
- Supports a matched Recall process where the recall is transmitted to both the lender and borrower by the proposed 9PM best practice cutoff.
- Supports Buy-IN processing.
- Eliminates Contract Compare Breaks since all transactions in the service are matched transactions on a daily basis.
- Eliminates Month End Rebate Interest Breaks since all transactions are matched and one day term transactions therefore the rebate money is settled daily.
- Supports Corporate Action Processing for Mandatory Events as we do for our NSCC CNS service.
This service has the offers participants who utilize it a lot of opportunity to reduce the current issues as they exist today and will only become more of a challenge in T1 world.
ETF Challenges
Batch Cycle Processing: DTCC is working to expediate their end-of-day pricing process; and will be transforming the ETF application from batch to real-time processing system. This expansion will allow for the acceptance of real-time Create & redeem activity and the reporting to clients in real-time.
Global Misalignment: Earlier posting of collateral to protect funds from default scenarios will be required due to many global T+2 settlement cycles. DTCC is looking at opportunities to expand its collateral management process for global activity for US-listed ETFs.
The misalignment of settlement timeframes between the ETF shares and the underlying global components will require the Authorized Participants (APs) to post collateral earlier than today to ensure the Fund is protected from any default scenarios.
A steering committee chaired by SIFMA has been working on drafting a proposal with the SEC requesting balance sheet/capital relief resulting from the additional collateral requirement due to the misalignment of settlement timeframes.
DTCC is also exploring opportunities to expand its collateral management process developed specifically for Fixed Income and Non-guaranteed securities and how that can be leveraged to further streamline the exchange of collateral for global components.
Overall Readiness on the Road to T+1
From custodians to dealers to asset managers, the move to T+1 will impact the entire industry. In the final part of the session, experts from across the ecosystem shared their insights about the move to T+1. David Kirby, DTCC Head of Americas Relationship Management joined Mark Austin, Head of Trade Support, Connor, Clark & Lunn Financial Group, Joe Barkley, Senior Vice President, Operations, Raymond James & Associates, Gloria Lio, Head of Global Securities Operations, BNY Mellon and Kieran Mullaley, Head of Delivery, DTCC Consulting Services, to discuss the road to T+1.
Benefits of T+1
- The move will drive overall market efficiency, allowing firms the opportunity to make changes and upgrades and reduce manual processes.
- By lowering the margin requirements between counterparties, firms receive the benefit of a reduction of capital.
- A push for more digital solutions and straight-through processing will drive operational efficiency and leverage real-time communication channels.
However, while sell-side participants benefit from capital reduction, one participant noted that the impact on the asset management community is limited, because friction and complexity could be introduced.
Global Interconnectedness
The move to T+1 is being planned simultaneously with Canada. To align with a three-day holiday weekend in both the U.S. and Canada, SIFMA has requested to the SEC that the move happen over Labor Day weekend 2024. At the moment, other jurisdictions are not planning to move to a shorter settlement cycle.
A misalignment of settlement cycles between the U.S. and Europe or elsewhere will have its unique challenges, especially given the time difference and differing settlement cycle. This may cause fund or index managers to have money out of the market for a full day and present other risks.
In managing exceptions, workflow tools are available that provide real-time communications and these will be invaluable given the shortened time window. Proper standing settlement instructions can help ensure that information sent and received is right from the beginning of the trade.
A Driver for Change
The move will require behavioral changes as much as technological advancement. For many firms, it will require a change in the hours of a workday past 5:00 PM or have them leverage their global footprint as they adjust to the condensed time windows. Other firms will need to drastically reduce or eliminate their manual processes. All firms will need to evaluate their processes and make changes and the panel agreed the time for that evaluation is now.