The U.S. Securities and Exchange Commission (SEC) has now adopted final requirements for a May 28, 2024 implementation date for the move to T+1 settlement for transactions in U.S. cash equities, corporates debt, and unit investment trusts. Taking 24-hours out of the settlement cycle represents significant challenges and will require firms across the globe to make both operational and technical changes across the trade lifecycle.
To help firms understand the changes and challenges of accelerated settlement, DTCC’s ongoing "Accelerating to T+1" series, launched last year, explores the impact of accelerated settlement and T+1 on specific industry segments.
Related: Discover More from the Accelerating to T+1 Series
Key themes from this session included:
A Priority Focus for Firms
According to new research conducted from the ValueExchange, many market participants face enterprise-wide challenges around the move to T+1, with responses indicating varying levels of preparedness across firm types and geographic locations, as well as numerous impacts across the trade lifecycle. In the latest session, industry experts discussed the overall global industry preparedness.
“When the industry moved to T+2 in 2017, many firms needed to add resources to support the transition,” said Robert Cavallo, Director, DTCC Clearance and Settlement Product Management. “However, the move to T+1 is fundamentally different — and technologically and behavioral changes must be the goal to ensure success.”
Firms should be focused on:
- Emphasizing STP: The SEC is emphasizing same-day affirmation as an enabler for STP. The change leaves just one day for firms to allocate, confirm and affirm institutional transactions by the DTC 9PM ET affirmation cutoff. Firms should prioritize straight-through-processing (STP) solutions, updating legacy inefficiencies and changing deeply ingrained processes.
- Global Impact: Given time differences around the world, a disproportionate impact will be felt for firms in Europe and APAC regions trading U.S. securities. Removing the only day to resolve exceptions requires firms in these locations to have a nuanced approach and possibly implementing a “follow the sun model,” if applicable.
- Buy-Side Recordkeeping: The buy-side needs to play an active role in meeting requirements given the amended recordkeeping Rule 204-2, which states registered investment advisors need to make and keep records of confirmations received and allocations and affirmations sent, each with a date and time stamp.
- Key Timing Changes: The new best practice submission time for allocations is 7 PM ET, and affirmation needs to happen by the DTC cutoff time of 9 PM ET in order for trades to be sent directly to DTC for settlement in an STP fashion.
According to Ana Lotharius, Director, DTCC ITP Product Management & Americas Industry Relations, in order to align with the targeted deadlines, firms need to not only assess their own readiness but also begin engaging with service providers and counterparties to determine their level of readiness.
“DTCC’s ITP Data Analytics service provides powerful analytics tools enabling firms to measure and compare operational performance against counterparties, industry standards and peers,” she said. “The service offers dedicated metrics and analyses on data points that can assist in preparations for the move to a U.S. T+1 settlement cycle.”
Additionally, the DTCC Consulting Services team can help firms identify and implement the right control and process enhancements, benchmark performance against peers, address settlement fails, manage product implementation, revamp technical architecture, optimize overall trade processing operations, and more.
Extensive Testing & Support
DTCC is using an Agile approach for development and testing, allowing the ability to test changes without waiting for the project to be fully completed. This will allow for changes throughout the project to ensure accuracy, provide flexibility – and keep moving forward.
DTCC has prepared an extensive nine-month testing schedule, starting on August 14, 2023, and will be available through May 31, 2024. During this time, the DTCC PSE-U testing window will be open for T+1 testing. DTCC will also be making its PSE-A region available in June for T+2 testing, as well as any testing of services not impacted by the transition to a T+1 settlement cycle.
Testing will be done across 21 bi-weekly cycles, and include scenarios such as:
- Implementation Weekend testing
- Corporate Actions
- Exchanges testing
- Good Friday testing
- Bank holiday testing
- Free Format testing
Firms can also do freeform testing based on their individual needs.
“The Friday preceding these test cycles, DTCC and SIFMA will host testing sessions where we will do a run-through of what will occur in these cycles and the specific scenarios and allow for a question-and-answer session,” said Cavallo.
DTCC’s Integration Team will be the main point of contact for inquiries and support during the testing phase.
Value Add of Affirming Trades
To accelerate settlement, post-trade agreement and affirmation need to happen faster. This is achieved through increased automation in the allocation, confirmation, and affirmation processes. A reduced dependency on manual workflows can help firms not only achieve greater efficiency but also reduce costs.
“CTM’s Match to Instruct (M2i) workflow acts as a key enabler to achieving T+1 settlement by automatically triggering trade affirmation and delivery of DTC-eligible securities directly to DTC for settlement when a trade match between an investment manager and executing broker is achieved,” said Lotharius. “In fact, most clients using the M2i workflow to match and affirm U.S. trades are approaching a 100% same day affirmation (SDA) rate by 9 PM on trade date.”
There is a tiered fee for delivery of affirmed and unaffirmed transactions through DTC:
- 4 cents: DTC processing of affirmed transactions processed through DTC’s ID ANE service
- 17 cents: For a transaction processed as a Night Deliver Order through DTC
- 54 cents: For a transaction processed as a Day Deliver Order through DTC
Given the consolidated timeframes on trade date, there is very little leeway for delays and firms should take that into account as they go through their development and testing plans. DTCC has done this same exercise by completing a “T+1 Health Assessment” of services and systems that will be impacted by the transition to a T+1 settlement cycle.
“It is a significant effort to accelerate the settlement cycle, in addition to extensive and meticulous planning and industry-wide engagement to support such a move, firms must consider the impact on their operations,” said David Kirby, DTCC Executive Director, Head of Americas Relationship Management/Global Account Management. “Adopting higher levels of straight-through processing and automation in post-trade operations will help ensure a seamless, orchestrated, and responsible implementation in the move to T+1. DTCC recognizes that significant challenges remain towards implementation and will continue to partner closely with market participants, as well as regulators, to promote a successful transition to T+1 and to safeguard the stability of the markets.”
View UST1.org for all news, documentation and information related to the industry's effort to accelerate the U.S. securities settlement cycle.