SEC Approves T+1 Settlement Cycle
Here’s what you need to know about the upcoming changes – and how Northern Trust is preparing.
On February 15, 2023, the Securities Exchange Commission (SEC) approved changes to modify Rule 15c6, Shortening the Securities Transaction Settlement Cycle, from trade date plus two (T+2) to trade date plus one (T+1). The SEC received over 3,000 comments, where most advocated for the shorter settlement cycle and supported a longer period to implement the change from the proposed March 31, 2024 compliance date. The industry widely promoted a conversion over the Labor Day weekend, September 2, 2024. In a vote of 3 to 2 the SEC approved a May 28, 2024 compliance date.
In the final rule the SEC excludes security-based swaps and adopts shortening the settlement cycle for firm commitments priced at 4:30 p.m. EST from T+4 to T+2. The rule promotes the completion of allocations, confirmations and affirmations by the end of trade date between broker-dealers and institutional customers.
The commission adopted new rule 15c6-2, which requires broker-dealers to enter into written agreements with their clients or enforce policies and procedures that are reasonable designed to achieve same day trade allocations, confirmations and affirmations by the end of trade date. In addition, the commission is enhancing the rule for Investment Advisors to retain the associated records subject to 15c6-2.
The SEC is also adopting new Rule 17Ad-27 to require clearing agencies that provide a central matching service to establish written policies and procedures designed to achieve straight through processing (STP) and file an annual report about their progression in achieving STP, which will be made available to the public on Edgar.
The Securities Industry and Financial Markets Association (SIFMA), the Investment Company Institute (ICI), and The Depository Trust & Clearing Corporation (DTCC) established an Industry Working Group (IWG) to accelerate the U.S. securities settlement cycle from trade date plus 2 (T+2) to trade date plus 1 (T+1) in the first half of 2024. In addition, the Securities and Exchange Commission (SEC) issued a proposal to change Rule 15c6, Shortening the Securities Transaction Settlement Cycle, on February 9, 2022. The combined efforts will reduce participant exposure and help strengthen the financial markets by transitioning from T+2 to T+1.
Moving to a T+1 execution and settlement process will require a rethinking of trade execution, processing, financing, payments and settlements. The Working Group has also discussed moving to T+0 and noted there would be significant challenges to this move, including a fundamental change in post-trade processes, and reworking the existing settlement process (including eliminating batch processes). The industry settlement change to T+0 will be considered in the future.
The Industry Working Group (IWG) published the T+1 Securities Settlement Industry Implementation Playbook, on August 1, 2022, and DTCC T+1 Test Approach: Detailed Testing Framework, on February 16, 2023, that firms can use for standing up their own change program. It includes:
- An overview of the T+1 Transition: Contains timelines, milestones, and guidelines for market participants to assist in the planning, development, testing, and migration to a T+1 settlement cycle.
- Primary Areas of Focus: Provides suggested activities across several business areas, including trade processing, asset servicing, documentation, securities lending, prime brokerage and funding.
- Next Steps: Detailed considerations for firms in the planning and execution of these impact assessment and implementation considerations, including:
- Response to regulatory changes
- Business readiness for migration.
- Detailed testing document on the structure of the T+1 industry testing and suggested scenarios with industry participants.
The industry has been discussing the eventual migration to a shorter settlement cycle since transitioning from T+3 to T+2, which was implemented on September 7, 2017. In addition, the SEC has highlighted two recent events that increased market volatility: March 2020 following the outbreak of the COVID-19 pandemic and January 2021 following the heightened interest in certain “meme” stocks. These two episodes have highlighted potential vulnerabilities in the U.S. securities market that shortening the standard settlement cycle could help mitigate.
Market participants have welcomed the new rule as a mechanism to reduce risk associated with securities trading activity, as well as strengthening and modernizing security settlement in U.S. financial markets.
Northern Trust has set up an enterprise-wide program to assess the impacts to our clients and our business. The program is made up of internal subject-matter experts within each of our asset servicing disciplines: Trade Lifecycle Management, Outsourcing, Fund Accounting, FX and Liquidity Management, Collateral and Margin Processing, Securities Lending, Data Management, Client Reporting, Product Management, Compliance and Marketing. Each of these disciplines has created their own working groups that report into the change program, which will all feed into our executive steer governance framework. Northern Trust has reviewed the Industry Working Group playbook and testing approach that was published in August 2022. The industry recommendations and considerations have been incorporated into our regulatory change program that aligns Northern Trust with the industry.
We are actively engaged in industry forums and working groups, such as the Association of Global Custodians (AGC), DTCC, ICI, SIFMA and others. The program has set up an active communication strategy across our business and our clients, which will be distributed through established communication channels such as the Northern Trust website, client newsletters, and regulatory forums. Northern Trust will be fully prepared to meet the May 28, 2024, compliance date.
Market participants should begin their internal review of their current operating models and assess where potential changes are needed to the existing process and or internal infrastructure to support the move to T+1. Clients should review the SEC rule and the operating playbook published in August 2022 by the IWG to help execute your own change program. In addition, organization should:
- review existing batch and manual processes
- trade confirmation, allocation and affirmation processes
- SSI (Standing Settlement Instructions) review to ensure accuracy
- engaging with your brokers and other service providers to assess any downstream impacts
- leverage industry testing approach
- review existing industry best practices and reference materials
Northern Trust continues to assess the client impacts and change requirements and will notify clients promptly if action is needed to address the T+1 transition in our products and services.
For more information, please contact your relationship manager, client service manager, or client service delivery manager. You can visit DTCC’s T+1 website for more information.
- Client FAQ (US and Canada): T+1 Settlement Cycle FAQ
- Factsheet - SEC Fact Sheet
- Industry Working Group Report: Accelerating the U.S. Securities Settlement Cycle to T+1
- IWG Implementation Playbook: T+1 Securities Settlement Industry Implementation Playbook
- DTCC’s Website: DTCC’s T+1 website
- Industry Testing Approach: T+1 High Level Test Approach
- T+1 Playbook Workbook - T+1 Industry Implementation Workbook
- CDS T+1 Industry Test Plan Approach
- A year to go: How the securities industry is preparing for T+1
- FX T+1 FAQ
- SEC Final Rule: Shortening the Securities Transition Cycle
- DTTC Podcast: Navigating T+1: ALERT's Automation and Risk Reduction Focus
The information in these materials is not intended to be and should not be treated as legal, investment, accounting or tax advice. Readers, including professionals, should not rely upon this information as a substitute for their own research or impact assessment or for obtaining specific legal, accounting or tax advice from their own counsel. This material is directed to professional clients only and is not intended for retail clients. For Asia-Pacific markets, it is directed to expert, institutional, professional and wholesale investors only and should not be relied upon by retail clients or investors.