In February 2022, the SEC proposed new rules to shift to a trading day plus one business day settlement (T+1) cycle for securities trades in the US. In a coordinated effort, the Securities Industry and Financial Markets Association (SIFMA), the Investment Company Institute (ICI), and the Depository Trust & Clearing Corp. (DTCC) have been leading the charge towards an accelerated settlement cycle. To summarize a brief history of the settlement cycle, in 1993, the industry transitioned from trade date plus five days (T+5) to trade date plus three days (T+3) settlement, and then again in 2017, the settlement cycle was shortened to trade date plus two days (T+2). If adopted, the T+1 settlement period would take effect on March 31, 2024. It’s worth mentioning that although the SEC is not proposing a same-day (T+0) settlement at this time, it has requested comments on how to reach this goal eventually.
What’s Behind the Change
The driving factors behind T+1 settlement are fairly straightforward: shorter settlement times will improve efficiencies and reduce risks for both investors and market participants. Efficiency gains and risk reduction are definitely things we can get behind, and we believe it’s important to stay current on the changes underway within our industry and their potential ramifications. According to an interview with Thomas F. Price, managing director of technology, operations, and business continuity at SIFMA, getting to T+1 will not be easy. “It’s exponentially more challenging to go from 2 to 1 than it was from 3 to 2,” he said. “Everything now gets put on a shorter cycle and there’s no room for error.”
“It’s exponentially more challenging to go from 2 to 1 than it was from 3 to 2. Everything now gets put on a shorter cycle and there’s no room for error.”
Thomas F. Price, Managing Director, Technology, Operations, and BCP, SIFMA
In other words, processes with issues today will be exacerbated in a compressed settlement cycle. Therefore it’s crucial for firms to understand the new settlement window’s impact. To help firms accomplish this, three industry groups have published a guide for market participants to prepare for the transition to the T+1 settlement cycle.
T+1 Implementation Playbook
In August 2022, SIFMA, ICI, and DTCC, with help from Deloitte, published a 176-page guide, the T+1 Securities Settlement Industry Implementation Playbook, which aims to smooth the transition to a one-day settlement cycle. The Playbook, a milestone in the industry’s multi-year effort to move to T+1 settlement, summarizes ways to assess and prepare for the many complex steps involved in this shift to T+1 settlement. The guide provides an outline to follow in evaluating the implementation activities, timelines, dependencies, and risks that firms should consider in preparing for the transition to T+1 settlement.
The Playbook has fourteen sections, eight of which examine specific areas of the trade lifecycle, including trade processing, asset servicing, documentation, securities lending, prime brokerage, and funding and liquidity considerations. Other sections in the Playbook outline issues relating to regulatory changes, buy-side considerations, industry testing and migration strategy, the global impact of T+1 transition, and primary offerings. Additionally, two sections analyze lessons that the industry learned in managing the transition from T+3 to T+2 settlement in 2017.
Not only does this resource provide valuable insights into the T+1 initiative, but it also gives perspective on the scale of the endeavor. Reviewing the information as you assess the impact of T+1 on your business is well worth your time. Check out the links below to access the T+1 Implementation Playbook as well as additional helpful resources.
T+1 Securities Settlement Industry Implementation Playbook – DTCC. https://www.dtcc.com/-/media/Files/PDFs/T2/T1-Industry-Implementation-Playbook.pdf
Shortening the Settlement Cycle – SIFMA. https://www.sifma.org/explore-issues/shortening-settlement-cycle/
Shortening the US Equities Settlement Cycle FAQ – DTCC. https://www.dtcc.com/ust1/faqs
Accelerating to T+1 Series – DTCC. https://web.cvent.com/event/8fa478fc-46ef-451f-bb46-c3f2a5122d7d/summary
DTCC’s Vital Role in Post-Trade Processing – Terrapin Technologies. https://terrapintech.com/dtcc-post-trade-processing/