While the compliance timeline for shortening the U.S. securities settlement cycle presents challenges, industry leaders say they're confident the transition will go smoothly, though months of intense planning and testing lie ahead.
The Securities and Exchange Commission in February finalized a rule to accelerate the settlement cycle to T+1 — settling a trade one business day after it is executed — from T+2, or two business days. The move is designed to benefit investors, including fund managers and pension plans, and reduce the credit, market and liquidity risks in securities transactions faced by market participants, the SEC said.
Trades executing and settling in a shortened period of reduces risk in the entire system, sources said.
In its final rule, the SEC pushed back the compliance date to May 28, 2024, which is the Tuesday after Memorial Day weekend, from the date outlined in the proposal — March 31, 2024. But several industry groups and stakeholders that submitted comments to the SEC requested that the implementation date be delayed until Sept. 3, 2024, the Tuesday after Labor Day weekend.
"We didn't understand the benefit in moving (the timeline to May instead of September) when industry experts are saying, 'Hey, we need these three months for testing and coordination,'" 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. "We're not asking for two years, we're asking for three months."
But now that the May 2024 date is final, Ms. Kane said the ICI, the Securities Industry and Financial Markets Association and the Depository Trust and Clearing Corp., three groups that have been industry leaders in advocating and planning for the shift to T+1, will be working hard to ensure firms are prepared in time.
In December 2021, the groups published an "industry implementation playbook" outlining 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 the Labor Day weekend date was requested to allow for sufficient time for industry planning and testing.
"I don't think it was unreasonable for that time, so you've introduced additional risk that you potentially could have mitigated," he said of the SEC. "I have no doubt the industry will get there, but it may be a little bit bumpier."
The SEC's two Republican commissioners voted against the final rule in February over concerns about the compliance timeline. Commissioner Mark T. Uyeda said he supports the move to T+1 but couldn't approve the rule.
"In my view, we are in an imprudent rush away from a sensible transition date and, for that reason, I am unable to support the final rule," Mr. Uyeda said at the February meeting.
SEC Chairman Gary Gensler said at the same meeting that he was "comfortable" with a 15-month transition period and noted that some commenters were pushing for a March 2024 or May 2024 compliance date.
Commissioner Hester M. Peirce, a Republican, responded to Mr. Gensler that added time for testing could be beneficial to firms and investors. "It seems like a small price to pay — three additional months — to get some of the additional testing done and to allow for alignment with our Canadian neighbors," she said.
Canada is also shifting to T+1 next year and both countries have simultaneous three-day Labor Day weekends.
But Canada, which was planning on shifting to T+1 at the same time as the U.S., does not have a three-day weekend in late May, so it will begin settling T+1 trades on May 27, 2024, one day sooner that the U.S.