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
In the fourth event in this five-part series, Matt Schill, DTCC Senior Product Management Director, moderated a panel consisting of Natasha Singh-Mohamed, DTCC Associate Director, NSCC Operations; Christopher Thiebaut, BlackRock Director, Head of U.S. Corporate Actions; and Steven Gale, Northern Trust Vice President, Asset Servicing, to discuss the impact of a T+1 settlement cycle on corporate actions.
The group opened the discussion with an outline of key considerations around the complexities of the Notice of Guaranteed Delivery (a.k.a. Cover/Protect) afforded to certain corporate actions. A big challenge of the Guarantee of Delivery feature, which is not standardized nor mandated, is that shortening the settlement cycle makes the process riskier and more manually intensive than it was ever intended for. Some impacts of the voluntary corporate action event process under a T+1 scenario discussed on the panel included:
- Deadlines and timing of liabilities
- How an accelerated settlement cycle will shorten the Cover/Protect period
- The voluntary corporate action event communication process between agents, DTCC and other industry participants
Changes to the DTCC processing schedules, including to the night cycle, will affect submission times of protect instructions for Continuous Net Settlement (CNS) eligible voluntary events. The new process for a T+1 settlement means long members will enter protect instructions from 9:45 - 10:45 p.m., prior to the start of the night cycle, which will begin at 11:30 p.m. on trade date.
Electing on input date provides the long member with the highest priority to receive CNS allocations during the night cycle. Prior to the night cycle, short members can view potential liabilities; after the night cycle, long members are able to view potential protects and view if they have received any CNS allocations during the night cycle.
Singh-Mohamed noted, “Once potential liabilities have been issued, CNS will not accept additional trades that settle on Cover/Protect Expiration Date for any security undergoing a voluntary event. They will be processed by NSCC as trade-for-trade.”
With one less day to balance CNS transactions in a T+1 cycle, DTCC recommends:
- Participants use CNS Positions Prior to the Night Cycle file/report
- Identify their final CNS positions and if they are a long member input their protect instructions in CNR on input date before 10:45 p.m.
- For same day settling trades received on Cover/Protect Expiration Date where NSCC is making them trade-for-trade balance orders, Participants should utilize the new, real-time summary and balance order messaging to identify counterparties earlier so they can pass liabilities to each other earlier on Cover/Protect Expiration Date
Corporate Actions Processing Pain Points
- Compressed timeframes: Managing expectations and implementing both operational and technical changes are all needed to move to T+1. For voluntary corporate action events, both reconciliation and timely settlement of trades on securities undergoing a corporate action is critical. Taking a comprehensive approach that will allow each firm’s system to consume the corporate action event announcement create client entitlements, perform trade reconciliation to determine the liabilities, and then ultimately tie-in the client instructions to DTCC all in a timely fashion is key to reducing risk, said Thiebaut.
- Location of holdings: Already a key concern for global custodians in the current T+2 settlement cycle, determining where their firm’s inventory is located is paramount to day-to-day operations since it determines the both the nature of and timelines to be considered per corporate action event. Moving to T+1 will increase these concerns as certain key entitlement dates. Capturing and sending messages in near real-time can help global custodians meet deadlines, and the automation of instructions using DTCC’s Voluntary Reorganization Instructions (VRI) process through ISO 200022 and API calls will help create efficiencies and mitigate risks.
- Industry Collaboration: According to Gale, everyone needs to shore up their processes, with a lot more scrutiny, oversight, and awareness for all markets they service, including Europe and Asia-Pacific. Noting that not all countries are changing to a T+1 settlement cycle in parallel, it is important that consideration is given to this fact as it relates to complex processes such as the corporate action event. Firms should use systematic messages that flow across the lifecycle wherever possible to eliminate the need for manual intervention. And consistency across the corporate action event lifecycle is just as important—with events, event specific dates and ultimately instructions differing per custodian for the same event. The industry needs to continue to collaborate to standardize these event processes and therefore industry trade groups like the ISITC Corporate Actions Working Group and the SIFMA Corporate Actions Forum where topics like these are discussed play such a critical role in the move to the T+1 settlement cycle.
Firms should start planning early and look across systems and business processes that could be impacted; create an inventory of applications may be impacted by the move to T+1 and review documentation from the T+2 migration to identify nuances within previously updated systems.
Testing will be key, and firms should look at test environments to begin that process. DTCC will be distributing two testing papers; the first will be a high-level testing plan and second, a more detailed testing plan describing testing at DTCC. Each of these papers will be issued the second half of 2022.
Lastly, trade fail management and exception processing due to trade fails may be on the uptick during the initial move to a T+1 settlement cycle. Leveraging newer services like DTCC’s ClaimConnectTM to foster straight-through claim processing, transparency and automation in a very cost-effective manner will help the industry limit exposure and ultimately provide full exception processing support during the onset of the migration.