In a few weeks, the US Securities and Exchange Commission (SEC) will close its comment period seeking industry input on its proposed rule that would shorten the standard settlement cycle for most broker-dealer transactions from two business days after the trade date, T+2, to one business day after the trade date, T+1, no later than the end of March 2024. In the same document, the SEC is seeking comment on how best to advance even beyond to T+1 to T+0, or end-of-day settlement.
The question is whether a mandated rule with a hard timeline is the best way to achieve faster settlement, said Brian Steele, global head of market solutions for Goldman Sachs, during Isitc’s annual Securities Operations Summit, held in Boston on Monday.
“I like the ambition. I’m not sure everyone shares that ambition,” he said, getting a laugh from attendees.
Today’s longer settlement times allow for several matches—of order execution, allocation, affirmation, and confirmation numbers—to be done on both sides of a trade before a security’s ownership changes hands and capital is transferred. While Steele and fellow speaker Michele Hillery, managing director of equities clearing at the Depository Trust and Clearing Corp. (DTCC), agree that decreased settlement time presents new and exciting technological and operational possibilities for the industry, many questions around technical implications and implementations remain unanswered and could carry downsides.
Whether the industry settles on T+1 or T+0 as its desired goal, the shift would require some heavy lifting by broker-dealers, investment managers, fund administrators, clearinghouses, and other stakeholders—as it also did in 2017, when asset classes such as stocks, bonds, and municipal securities moved from a T+3 structure to T+2.
The rule as it’s currently written introduces a contractual relationship between broker-dealers and investment managers, Steele said. And in some cases, if investment firms are in execution-only relationships with their broker-dealers, there likely aren’t contracts in place today that can simply be added to or amended.
“What does that mean? It means we have to then go out and create contracts with thousands of clients potentially that don’t otherwise have a robust contractual agreement that warrants appending this language to—which could be a significant re-papering exercise,” Steele said.
If the faster settlement rule is not adopted, there are other ways the industry could see it come to fruition. For example, the SEC could eliminate instituting a rule altogether and let the industry make its way there on its own time. There would still be financial incentives to move toward faster times, as the slower-to-adopt firms would see increased margin and higher costs to settle transactions, Steele said.
DTCC’s Hillery noted that the implications of T+1 (which is DTCC’s stated goal, according to a December 2021 whitepaper it authored alongside Sifma, ICI, and Deloitte), and T+0 to an even greater extent, are heavily dependent on time zones. The US was the last major market to adopt T+2 in 2017, but that was the easiest outcome; the rest of the world’s exchanges are always hours ahead of New York’s. If the US becomes the first to move to T+1, that dynamic inverts, she said.
That could lead to foreign clients having to make additional investments in new technologies, platforms and human capital to continue trading during US business hours. An Asia-based client 12 hours ahead of the US, for example, may need to create or invest in a system that can “follow the sun” in order to make and settle trades during US business hours.
Steele and Hillery agreed that more industry-wide standards are sorely needed in settlement, particularly around reference data, where terminology that doesn’t match—such as opposing entity or instrument identifiers—can create trade fails. There is also no industry-wide standard for settlement instructions, which are party-specific instructions that have been agreed in advance and used every time a trade is made—an area that Steele called a continuing “struggle.”
The trade settlement lifecycle feels “incredibly antiquated” for what’s supposed to be an electronically traded market, he said. One outstanding question is whether these operations processes can be responsibly sped up to a single day or less, or whether settlement should be approached with a whole new lens.
“I think this offers up the opportunity to think about how we should be operating as an industry. What are the right steps and processes that we need to be able to support these particular asset classes? And what’s the infrastructure that needs to be either enhanced or deployed or, in some cases, actually created that will help us facilitate this industry for decades into the future?” Steele said.
Further reading
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@waterstechnology.com or view our subscription options here: http://subscriptions.waterstechnology.com/subscribe
You are currently unable to print this content. Please contact info@waterstechnology.com to find out more.
You are currently unable to copy this content. Please contact info@waterstechnology.com to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@waterstechnology.com
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@waterstechnology.com
More on Regulation
Verafin launches genAI copilot for fincrime investigators
Features include document summarization and improved research tools.
Waters Wrap: Open source and storm clouds on the horizon
Regulators and politicians in America and Europe are increasingly concerned about AI—and, by extension, open-source development. Anthony says there are real reasons for concern.
DSB says industry is ready to meet UPI mandate ahead of deadline
The Unique Product Identifier will be required for certain OTC derivatives in the EU at the end of April, following US adoption in January.
‘Very careful thought’: T+1 will introduce costs, complexities for ETF traders
When the US moves to T+1 at the end of May 2024, firms trading ETFs will need to automate their workflows as much as possible to avoid "settlement misalignment" and additional costs.
Court case probes open-source licenses as movement stands at crossroads
The Software Freedom Conservancy’s lawsuit against TV-maker Vizio begins trial in California, raising questions about open-source licenses and the risks posed by adhering to them.
Waters Wavelength Podcast: Countdown to T+1
DTCC’s Val Wotton joins the podcast this week to discuss the impending move to T+1 in the US.
Consolidated tape hopefuls gear up for uncertain tender process
The bond tapes in the UK and EU are on track to be authorized in 2025. Prospective bidders for the role of provider must choose where to focus their efforts in anticipation of more regulatory clarity on the tender process.
Fighting FAIRR: Inside the bill aiming to keep AI and algos honest
The Financial Artificial Intelligence Risk Reduction Act seeks to fix a market abuse loophole by declaring that AI algorithms do not have brains.
Most read
- Chris Edmonds takes the reins at ICE Fixed Income and Data Services
- Deutsche Börse democratizes data with Marketplace offering
- Nasdaq reshuffles tech divisions post-Adenza