The Securities and Exchange Commission has announced that the US will cut its settlement cycle by one day by 28 May 2024, which is earlier than anticipated.
The standard settlement cycle for most broker-dealer transactions in securities will be reduced from two business days after a trade, T+2, by one day to T+1. Gary Gensler, chair of the SEC, said in a statement that the change will reduce latency, lower risk, promote efficiency and greater liquidity in the markets.
“Today’s adoption addresses one of the four areas the staff recommended the Commission address in response to the meme stock events of 2021,” Gensler added. “Taken together, these amendments will make our market plumbing more resilient, timely, orderly, and efficient.”
Virginie O’Shea, founder of Firebrand Research, a provider of research and advisory services, said in an email to Markets Media that the May 2024 date is likely to be a shock as many in the industry had asked for postponement until at least September next year.
“As Firebrand’s research indicates, the majority of banks and brokers require significant updates to their systems in order to prepare for the move,” she added. “The smaller and mid-size firms, and even some of the larger firms, are likely to struggle to find the resources to implement such big changes in 14 months, especially when cuts are being made to operations and technology staffing and budgets due to the market downturn.”
A white paper from Torstone Technology, a software-as-a-service platform for post-trade securities and derivatives processing, and Firebrand Research estimated that a large majority, 81%, of brokers and banks active within the US and Canadian markets were either using manual processes or home-grown systems to support their post-trade processes. They will need to improve efficiency across the middle- and back-office and increase automation in order to comply with accelerated settlements.
O’Shea said the change also brings new record keeping requirements for broker-dealers related to the technology, systems and processes they have in their post-trade environments.
“I don’t expect the industry will be fully ready in time for the move, given the state of things as they stand,” she added. “There will be a lot of panic buying and pushback over the next few months.”
The final SEC rules will also require a broker-dealer to either enter into written agreements or establish, maintain, and enforce written policies and procedures reasonably designed to ensure the completion of allocations, confirmations, and affirmations as soon as technologically practicable and no later than the end of trade date. Registered investment advisers will also be required to make and keep records of the allocations, confirmations, and affirmations for certain securities transactions.
There is also a new requirement to facilitate straight-through processing, which applies to certain types of clearing agencies that provide central matching services, and require them to submit an annual report to the regulator that describes and quantifies progress with respect to straight-through processing.
Pete Tomlinson, director of post-trade at the Association for Financial Markets in Europe (AFME), agreed in a statement that the May 2024 goal is ambitious and will be a significant challenge for all market participants globally.
“Adopting T+1 settlement in Europe will be significantly more challenging, given the fragmented nature of European markets and the greater operational, structural and regulatory complexity,” added Tomlinson. “Further analysis is required across the industry to quantify the costs and benefits, and the changes required to the current operating environment to facilitate such a move.”
Kenneth Bentsen, chief executive of SIFMA, said in a statement that the industry strongly supports the transition to T+1, and has been working on the project since 2020.
“As we have repeatedly stated for the past two years, the industry needs ample time to execute the transition and doing so following the Labor Day weekend 2024 in coordination with Canada is the optimal date,” he added. “It is the industry, and not the regulators, who will do the work to shorten the cycle and rushing the implementation for no apparent reason will only add risk when the underlying goal is to mitigate risk.”
Bentsen continued that market participants are encouraged to refer to The T+1 Securities Settlement Industry Implementation Playbook, developed by SIFMA, ICI, and DTCC and Deloitte LLP.
David Smith, capital markets practice lead at Broadridge Consulting Services, said in an email that it is not surprising the SEC didn’t want to delay achieving the benefits of T+1 much further than the original proposal date of March 2024. However, the earlier date has greater implications for cross border transactions between the US and Canadian marketplace as it intersects with Canada’s own post trade modernization project timeline.
” If Canada is not able to meet the earlier US timeline, you create a mismatched settlement cycle,” Smith added. “This creates a risk between two countries that have been historically frictionless in terms of their settlement process.”
Chris Iacovella, chief executive of the American Securities Association, said in a statement that appropriate settlement delays provide brokers with a clear picture of their and their client’s capital position and that makes equity markets less vulnerable.
“ASA appreciates the SEC adopting many of our recommendations and welcomes the transition to reduce the settlement time to T+1, but we caution the SEC to wait and see how the market reacts to these changes before moving beyond that timeline,” added Iacovella. “Any consideration of moving to a T+0 regime needs to be well thought out, stress tested, and fully considered prior to moving to the proposal phase.”
Caitlin Long, founder and chief executive of crypto Custodia Bank, said :
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