John Abel, Vice President, DTCC Settlement Services
In the white paper, “Shortening the Settlement Cycle: The Move to T+2”, the T+2 Industry Steering Committee (T+2 ISC), Industry Working Group (IWG) and sub-working groups (SWGs) identified the regulatory changes and industry-level requirements to facilitate a move to T+2 for equities, corporate bonds, municipal bonds, unit investment trusts, and financial instruments that comprise these products.
In this three-part series, DTCC Connection will explore in greater detail the regulatory changes and industry-level requirements identified by the IWG and SWGs. In this second installment, John Abel, Vice President, DTCC Settlement Services, discusses the regulatory and documentation changes needed in conjunction with T+2, and how different segments of the industry must react.
DC: How were the regulatory changes determined, and what input is needed?
JA: The ISC engaged an outside law firm to review the rules and regulations of various regulators and Self-Regulatory Organizations (SROs) to determine which rules, if any, needed to be changed to support the industry’s move to T+2.
Once the rules were identified, the ISC sent a letter outlining the rules that required changes to the impacted regulators and SROs — including the Federal Reserve, the Securities and Exchange Commission (SEC), the Municipal Securities Rulemaking Board (MSRB) and the Financial Industry Regulatory Authority (FINRA). In addition to identifying rules that need to be changed, the letter also made certain recommendations, including suggested language for the revised rules. The ISC’s goal was to make the process as easy as possible for the various regulators and SROs.
The industry-level requirements are grouped into four major areas:
Asset Servicing: Requirements related to asset servicing functions that include ex-date and cover/protect period computations for corporate actions.
Trade Processing: Requirements for trade processing activities, including reference data setup, real-time trade matching, straight-through processing and the delivery of physical securities.
Documentation: Requirements related to agreements and procedural documentation. For example, ETF trading relationship agreements that reference settlement date as T+3 must be revised at the distributor level and official statements and prospectuses must reference T+2 as standard settlement.
Regulatory Changes: Regulatory rule changes that will be necessary for migration to T+2.
DC: How will these regulatory changes affect our clients?
JA: In order for the industry to meet the proposed implementation date of Q3 2017, clients will need to begin their internal development work in the near future.
Some clients have already begun studying the necessary changes while others have told us they are unable, or unwilling, to commit significant resources to the T+2 project until they get “regulatory certainty.” Regulatory certainty means different things to different clients, but most generally view it as either a firm commitment from regulators to make the required changes or the actual publication of the modified rules.
DC: Which types of documentation will need to be updated with the move to a shortened settlement cycle?
JA: Specific documentation will vary by firm, of course, but in general, updates will need to be made to contracts, internal training materials and internal procedures that deal with settlement dates. Firms will also need to review all client-facing documentation to determine what changes, if any, are required.
DC: As the industry waits for this critical regulatory certainty, what efforts are being done internally at DTCC to prepare for T+2?
JA: DTCC, like most other firms, has a number of internal system changes it will have to make to support of the move to T+2. DTCC has assembled a cross-functional project team that has identified the required modifications and has already begun the process to implement these changes.
DTCC also has identified a number of changes that need to be made to DTCC’s rules, and the process is already underway with counsel to make these updates. Lastly, DTCC is central to the operation of the industry and critical to testing the T+2 implementation. As such, DTCC has taken the lead in developing test plans and test approaches for the migration to T+2.
DC: How will DTCC’s internal efforts impact clients and the industry?
JA: As a central hub for the industry, there are many touch points, or interfaces, between DTCC and its clients. Any changes that DTCC makes will have a direct impact on individual clients as well as on the industry as a whole. Many clients may decide to wait for DTCC to outline how, if at all, existing interfaces will be impacted by the move to T+2. Then they will design their system changes accordingly. For this reason, DTCC is trying to be very proactive in identifying and communicating our changes as soon as possible.
DC: How can clients continue to follow and engage with any T+2 developments?
JA: Clients can stay engaged through multiple avenues. There are industry groups that meet regularly in addition to several conferences and industry events focusing on T+2 efforts. We have also set up a T+2 industry website (http://www.UST2.com) as a way to share information. I highly recommend those within the industry to stay engaged as the move to T+2 continues to develop.