ISITC responds to SEC's proposed move to T+1

In February of this year, the US Securities and Exchange Commission (SEC) released its formal proposal to shorten the standard settlement cycle for most securities transactions from two business days following the trade date (T+2) to one business day (T+1). This has sparked a lot of discussion among various players in the industry, ISITC included. During the 60-day comment period, the SEC received more than 300 submissions to review.

If adopted, as of now, the proposed amendments would have a compliance date of March 31, 2024. Many firms and industry groups have voiced concerns about what they see as a slightly aggressive timeline, with some offering alternative compliance dates later in 2024.

But whether the timeline is too short or not, the industry is accelerating toward efficiency at a historically torrid pace, largely due to modern advances in technology. It took 24 years to move from T+3 to T+2 back in 2017. The projected move to T+1 would mean knocking another day off of current settlement three times faster.

Overall, ISITC welcomes the endeavor to improve the efficiency of markets and reduce risk. Being a highly collaborative organization representing many constituencies, we also appreciate that the SEC has made a committed effort to hear many different perspectives within the industry’s wide and complex ecosystem in the beginning of this journey.

We also acknowledge that this acceleration toward greater efficiency will require progressively higher levels of collaboration among industry players.

With that said, we would like to share some of our letter to the SEC and some of the key issues we raised for consideration moving forward.

T+1 is its own unique undertaking, and much different from T+0
When the SEC opened its comment period, it also asked for feedback on a move toward T+0, or end-of-day settlement. To be sure, the work required to move to T+1 will serve as a stepping stone to any later considered move to T+0. However, the initial focus should remain squarely on T+1, or risk distracting from resolving the unique issues posed by T+1.

T+0 will be its own undertaking, inviting a more drastic overhaul of industry and individual firms’ infrastructure and operating models to support near-real time settlement. When the rubber hits the road, taking it one step at a time will be prudent in helping maintain a sharper, achievable focus.

Unintended consequences of new contractual agreements
Formal contractual requirements between broker-dealers and clients of asset and investment managers, or between broker-dealers and investment managers, were not required in the moves to T+3 or T+2. This is a novel approach that many in the industry have flagged as a concern, since it implies the introduction of contracts where none exist today.

Some have called this a potential “re-papering” exercise, which itself would be disruptive, but in reality, it would instead be a completely new papering exercise between entities that today do not have direct contractual obligations, requiring a firm to create new contracts with hundreds (or thousands) of entities with which they currently do not have any contractual relationships.

Along with legal and administrative teams, the back office would ultimately shoulder the burden of these contractual agreements. The ISITC Settlements Working Group has raised concerns as to what kind of oversight would be required, and what form any enforcement would take. There were questions on how accountability would be assigned, as certain flows that would be subject to the proposed contractual agreements have multiple dependencies on different entities not identified in the proposal.

Clearing the technology hurdle without leaving smaller firms behind
The communications and protocols required in a move to T+1 are varied depending on the trade type. For example, when a broker-dealer trades with another broker-dealer, the resulting continuous net settlement (CNS) process is significantly different from the institutional account delivery vs. payment (DVP) or receive vs. payment (RVP) process. While both finally resolve within the involved parties’ DTC accounts within the Depository Trust and Clearing Corp. (DTCC), the paths taken to finally get there are vastly different.

We detailed those differences in our letter, and the bottom line is that most firms will address many of the operational aspects of T+1, regardless of trade type, by investing in technology to help automate the various communication processes.

While the top-tier and many second-tier firms will have the resources to invest in these technologies, for a significant population of second- and third-tier managers and clients, automation investment is limited to non-STP solutions—such as creating automated emails, or even PDF-style documents sent via email, which is essentially mimicking the fax processes of decades ago. This lack of automation can include clients of top-tier and second-tier firms that otherwise may be highly automated.

There should be some consideration of these market participants, in that they could be disenfranchised if necessary technological investment costs necessary for T+1 participation outweigh their ability to operate their businesses, especially for regional providers.

While there are many issues left to be sorted out as the industry marches along the path toward T+1, our membership is confident that a continued high level of engagement between the SEC, ISITC and the industry can resolve open questions and agree on best practices for moving forward.

At ISITC, we look forward to continued engagement with the SEC, and other industry participants, including through our focused working groups and forums, or creating a platform at upcoming meetings to directly interact with the SEC and other industry participants on the issues we’ve raised.

Since ISITC oversees many of the operational US securities industry market and best practices, we embrace our role to codify operational processes by updating these documents accordingly as T+1 moves closer to finalization.

The views of ISITC are its collective views as market experts and are not necessarily representative of any individual firm’s position.

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