The long awaited move to USD T+1 settlements is expected to be approved in Q3 2022, with a target implementation date of Q3 2024, so now is an opportune time for institutions to consider the impacts and challenges in meeting those timelines.
The implementation of T+1 settlement will require a reassessment of existing industry processes for settling securities, including equities, corporate bonds, UITs, mutual funds, ETFs, and security-based swaps and options. As a rule, T+1 settlement will move a lot of processing to trade date, and processing will typically run at the close of trade date rather than T+1. The challenges of a T+1 settlement will therefore be particularly acute for non-US investors who may be required to pre-fund cash positions and deposit securities prior to trading.
Approval for the switch is pending with the SEC, but once confirm the transition is anticipated to be scheduled over a 2 year window. Firms should work with their counterparties, vendors, regulators, and clients to better understand their internal impacts relating to this migration. Additionally, firms should continue to engage in industry discussions with SIFMA, ICI, and DTCC to remain updated on information regarding this initiative as the IWG will continue to release additional information as it becomes available.
In this our second blog we look at the allocation and documentation impacts, and highlight some next steps.
Allocations and Affirmations
- The allocation of institutional trades is one of the key post-trade processing steps. Only when trades have been allocated can the affirmation and confirmation begin. Current processing shows that approximately 20% of allocations occur throughout the trading day with the remaining 80% of allocations occurring after market close on trade date.
- Although most allocations occur post-market close the proposal is for the affirmation timeline of 11:30 AM ET on T+1 to be brought forward to 9:00 PM ET on trade date. Clearly allocations will need to support this.
- To meet the revised affirmation cut-off time, the IWG recommends that allocations are made as soon as practicable after an order is executed to ensure members have sufficient time for affirmation processing. Market participants located outside of the U.S. may need to consider pre-allocating trades prior to the close of their business day or the complete execution being filled to ensure the allocation process is completed.
- Encouraging trades to be affirmed throughout the trading day increases the time firms must process allocations and increases the likelihood of timely affirmation. Trades that are affirmed before 9:00 PM ET on T would be eligible for DTC’s ID ANE settlement process, and for Prime Broker transactions, NSCCs CNS service. Following the affirmation process, the affirmed trades will be sent from DTCC’s ITP service to DTC and NSCC for processing in DTC’s Night Cycle Batch process which will start on the evening of T (proposed start time at 11:30 PM ET).
- Moving to a T+1 settlement cycle, which involves compressing the allocation timeframe, could lead to an increase in trade breaks if the allocations are not completed in a timely manner.
- The IWC are encouraging allocations be completed by 7:00 PM ET on T to ensure that firms have sufficient time to process affirmations by 9:00 PM ET on T.
- All firms submit allocations as soon as possible following trade execution.
- Identify root causes and educate industry participants to promote intraday allocation processing
- Change the affirmation deadline from 11:30 AM ET on T+1 to 9:00 PM ET on T.
- Update legacy technology systems and processes to process allocations throughout the day giving as much time as required to process affirmations by the new deadlines.
- Encourage the industry to get affirmed transactions into the DTC night cycle on T.
- There are several different types of industry documents that reference securities settlement which will need to be assessed when changing the settlement cycle to T+1. These documents may be categorized into three broad categories: Transactional, Administrative, and Agreements.
- The change will require documentation language updates and will impact resourcing and delivery processes (including the associated technology vendors) for both buy-side and sell-side firms.
- Meeting the current regulatory requirements regarding documentation delivery (i.e., confirmations) will be a challenge in a T+1 settlement cycle.
- In a T+1 environment, firms are going to be challenged to meet the timing requirements for physical delivery of confirms due to the constraints on printing and postal delivery. As a result, the industry believes that SEC rules should allow electronic delivery of confirmations and other documentation to be the default method of delivery to ensure that investors receive documentation on a timely basis consistent with current rules.
The IWG supports e-delivery as the default standard for delivering transaction documents to customers. In addition, the group supports further digitization, such as the basic PDF delivery of confirms and statements, in leveraging technology for these processes. This change would require the support of regulators to change the existing regulations regarding documentation delivery. Such regulatory change would need to address the following key areas:
- Support “access equals delivery” as a default for communication to investors (e.g., statements, prospectuses, agreements), which would satisfy the “delivery” requirement for securities documentation.
- Clarification on what constitutes “delivery” for electronic confirmations in accordance with SEC Rule 10b-10 under the Exchange Act.
- Remove rule references that trigger the Electronic Signatures in Global and National Commerce Act (E-Sign Act) and therefore inhibit clients from receiving e-delivery of investor documents.
- E-Sign Act may inhibit market participants, due to a potential requirement related to the re-confirmation of the e-delivery designation for documents required to be delivered “in writing”.