Industry gears up for T+1 settlement but needs SEC clarity

Accelerating the U.S. securities settlement cycle is all but certain to happen in 2024, but to make sure the transition happens without a hitch, months of planning and testing are required, and industry leaders say clarity from the Securities and Exchange Commission is needed sooner rather than later.

"It's hard to set a testing schedule when you don't know the implementation date," said Joanne Kane, Washington-based chief industry operations officer at the Investment Company Institute, an association of regulated funds including mutual funds, exchange-traded funds and closed-end funds. "The sooner that the SEC can either give us an indication of the date or give us the final rule, the better."

ICI, the Securities Industry and Financial Markets Association and the Depository Trust and Clearing Corp. published in August an "industry implementation playbook" on shortening the settlement cycle to T+1 — settling a trade one business day after it is executed — from T+2, or two business days.

Thomas F. Price, New York-based managing director of technology, operations and business continuity at SIFMA, a trade group that represents securities firms, banks and money management companies, said the move to T+1 will be beneficial to the entire securities settlement ecosystem, including large asset owners and managers.

"All of those trades executing and settling in a shortened period of time really reduces risk … that has to give, I would think, managers and pension plans a lot more comfort that there's a community effort to continue to reduce the risk," Mr. Price said. "Risk is the square root of time. The quicker you can reduce that period between trade and settlement, you're in effect reducing risk in the system."

Industry groups have been pushing for a move to T+1 for years and in February, the SEC issued a proposal to do just that. But while the proposal's comment period closed in April, the commission has yet to issue a final rule to let stakeholders know the official T+1 transition date.

Under the SEC proposal, the T+1 transition would be implemented by March 31, 2024. Several groups and individuals who submitted comments to the SEC requested that the implementation date be pushed back until Sept. 3, 2024, which is the Tuesday after Labor Day weekend.

Mr. Price, one of the proponents of pushing the implementation date to Sept. 3, said the three-day holiday weekend would give the industry the time needed to ensure the transition goes smoothly. "We expect it to be flawless, but we'd like the proper amount of time to make sure that we get there," he said.

Moreover, Canada also has plans to transition to T+1 in 2024 and has a similar three-day weekend at the same time, which makes pushing the implementation date back advantageous, Mr. Price said. In its comment letter, the Canadian Capital Markets Association noted the Tuesday after Labor Day would work well.

Stakeholders would prefer to get clarification from the SEC on this matter soon, Ms. Kane said. "Funds and intermediaries are spread very thin between all the different regulations and proposals out there, so without a final date you lose the ability to focus the industry, but you also can't plan the testing window until you know the date it has to close," she said.

The SEC did not respond to a request for comment.

The playbook published by the industry trade groups outlines a road map for market participants to identify the implementation activities, timelines, dependencies and risk impacts that could arise when planning for the transition to T+1.

Bob Walley, a New York-based principal at Deloitte & Touche LLP who assisted in crafting the playbook, said firms need to start preparing for the transition now. "Every day lost is a day lost," he said. "Waiting for the SEC's rule, while it'd be nice to have certainty ... in my anticipation, (it) won't change (things) dramatically."

He added, "Right now, there's so much work to be done to understand what the impacts are, to get your resources in place, get your budgets in place now so you can progress the work. If you wait until the rule comes out, you'll have lost six more months and then you'll probably be under budget, you won't have your teams organized, you'll really be behind the eight ball and at risk of not meeting the transition dates."

Added Ms. Kane, "There's a lot (to do) and I think it's important that funds and firms begin their planning now and start looking at things because 2024 is going to be here before you know it."

The settlement cycle in the U.S. was shortened to T+2 from T+3 in 2017, a process sources said went smoothly and benefited all market participants.

Mr. Price said testing was crucial in the transition to T+2 and will be important to resolve any issues before a T+1 environment goes live. But while there are lessons the industry learned in transitioning to T+2 five years ago, this time will be different.

"It's not a Y2K moment or even a (T+3) to (T+2) moment where so much planning and preparation went into that and when you look back you say, 'That wasn't so hard; that was pretty easy,'" Mr. Price said. "This is a little bit more complex because you're really taking 24 hours out of the system. Things like errors and corrections, you're going to have to expedite that."

Automation will be key in a T+1 environment, Mr. Walley said. "There are tremendous opportunities to take the friction out of the settlement system and modernize it," he said. "I think that those who are preparing for T+1 need to look at the manual activities (where) people put their hands on keyboards and have to manually fix a broken data element or issues, that basically needs to be eliminated."

Most industry participants will be affected by the change, including broker-dealers, Depository Trust and Clearing Corp. participants, custodians and asset managers, Ms. Kane said. "In short, all industry stakeholders will need to ensure that they have appropriate budgets and resources to enhance systems, update processes and procedures, and participate in the industrywide testing scheduled for 2023," she added.

But while the industry is focused on the T+1 transition, calls for T+0, or same-day settlement, may not be far behind.

The SEC proposal asked stakeholders for feedback on the potential for T+0, while the SEC ostensibly endorsed the idea.

"The commission preliminarily believes that implementing a T+0 standard settlement cycle would have similar benefits of market, credit and liquidity risk reduction that were realized in the shortening of the settlement cycle from T+3 to T+2 and are expected in moving from a T+2 to a T+1 standard settlement cycle," it said in the proposal.

SEC Chairman Gary Gensler has also backed T+0 in public comments.

But industry leaders aren't optimistic about the idea.

"T+0, in our view right now, increases risk because it would be a fundamental rewrite of the distribution system," Ms. Kane said. "You'd be essentially settling in real time, which the industry is not set up or designed to do at this time. And if you do that you also remove any recovery time so there's no time to address fails, there's no time to address issues that come up."

Mr. Price said T+0 would put "more risk into the system" because there won't be sufficient time to process and confirm trade details.

Added Mr. Walley, "To me, T+0 is, 'Just because you can doesn't mean you should.'"