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The Move to T+1

A Conversation with Tom Price and Anthony Macchiarulo

In this episode of the SIFMA Podcast, SIFMA President & CEO Kenneth E. Bentsen, Jr. sits down with Tom Price, SIFMA managing director, Operations, Technology and BCP, and Anthony Macchiarulo, Senior Associate, Financial Services Operations, to discuss SIFMA’s efforts to accelerate the settlement cycle from T+2 to T+1 and the recently published T+1 Playbook, which was designed to serve as a resource to provide guidance around activities, timelines, dependencies and risk associated with the move to T+1.

Transcript

Ken Bentsen: Thanks for joining us for this episode and most podcast series. I’m Ken Benson, President and CEO. I’m joined today by my colleagues Tom Price, SIFMA, managing director, Operations, Technology and BCP, and Anthony Macchiarulo, Senior Associate, Financial Services Operations, for a conversation on our efforts to accelerate the settlement cycle from T+2 to T+1, which was expected to take place two years from this week.

In particular, we will discuss our recently published T+1 Playbook, which was designed to serve as a resource to provide guidance around activities, timelines, dependencies and risk associated with the move to T+1. So let’s get started. So Tom, in the spring of 2020, SIFMA, along with the Investment Company Institute, the ICI and the Depositary Trust and Clearing Corporation, or DTCC, announced that our organizations were collaborating on efforts to accelerate the U.S. securities settlement cycle from T+2 or two business days after the trade is executed to T+1 or one business day after a trade is executed. To start, let’s define the settlement cycle and talk about why it’s so important.

Tom Price: Thanks Ken. The settlement cycle refers to the time between trade date, when an order is executed in the marketplace and settlement date when participants exchange cash for securities in the trade is considered officially finalized. Currently, equities and other products in the U.S. have a standard two day settlement cycle referred to as T+2, which was a key milestone the industry achieved in September of 2017, when the U.S. and other countries in the Western Hemisphere moved from trade plus three to trade plus two settlement cycle.

The industry is now planning to shorten the settlement cycle to one business day after trade execution, commonly referred to as T+1. The length of the settlement cycle is important because there is risk that a counterparty to a trade may not fulfill its obligation between the time the trade is executed and when the security settles on the client’s account.

The longer this period of time, the greater the risk that a counterparty could potentially not fulfill their obligation. This risk becomes elevated during times of high volatility and stressed market conditions as unpredictable events such as the risk of a firm default could potentially impact the transfer of cash or ownership of securities. Under the current T+2 settlement cycle, time is risk. You have a risk over two full business days.

Therefore, by reducing the settlement cycle to T+1, we would take a full day of risk out of the system. The NSCC, the National Securities Clearing Corp., which is a subsidiary of DTCC, mitigates this risk for centrally cleared activity by guaranteeing settlement all cleared trades. However, the length of the settlement cycle also has an impact on the margin requirements that participants need to post at the NSCC.

Because a longer settlement cycle equates to increased risk, market participants face higher margin requirements with a two-day settlement cycle to manage those risks. Those margin requirements equate into billions of dollars of participants capital posted to the NSCC on a daily basis. Perhaps I could ask Anthony a question on this. Anthony, you’ve been a key contributor in this project. Can you describe the benefits of reducing the settlement risk for the participants?

Anthony Macchiarulo: Sure, Tom. Thank you. So reducing the settlement cycle will create greater efficiencies in the market and further protect investors. Accelerating the settlement cycle will reduce systematic risk, operational risk, liquidity needs, buy-side counterparty exposure, broker to broker counterparty risk, and by reducing these risks would also reduce margin requirements and collateral requirements for broker-dealers. An accelerated settlement cycle will also allow investors quicker access to their funds, following trade execution and settlement. Additionally, shortening the settlement cycle will reduce and mitigate systematic risk by reducing exposure between the counterparties to a trade, between the counterparties to the clearinghouse, and for the clearinghouse itself.

Tom Price: Thanks, Anthony. Ken, back to you. Can you address or discuss the level of industry engagement in this process today?

Ken Bentsen: Yeah. Thanks, Tom. Thank you and Anthony for being here. The industry has been incredibly engaged in this project and maybe just to add a little bit of historical context, Tom, you talked about the transition back in 2017 from 3 to 2, which the industry SIFMA, ICI, and DTCC led. Similarly here, and I might also add, just for the benefit of our listeners, it took a couple of years to get from 3 to 2.

It wasn’t that long ago. If you go back two decades before, the settlement cycle was five days and that was changed back in the mid-nineties. So, we’re seeing continued automation and advancements to reduce risk in the system and this is something that the industry is driving. At the start of this project of going to move to T+1, an Industry Steering Committee, an industry working group and sub-working groups were formed to develop an industry consensus for an accelerated settlement cycle transition, including to understand the impacts, evaluate the potential risk and develop an implementation approach.

Hundreds of hours have been committed to this effort by industry members and market participants to understand the impacts and to work toward solutions for a T+1 settlement. The Steering Committee and working groups participated in daily calls to develop consensus on the associated risks and benefits of an anticipated accelerated settlement cycle, including the potential for a move to T+0 or real-time or end-of-day settlement in the future.

The sub-working group calls averaged 175 to 250 participants across the broad range of industry member firms who shared their perspectives on the benefits and challenges posed to achieving a workable solution that would reduce risks and modernize the settlement cycle without adding more risk to the system, and industry participants and our members have stayed deeply engaged in the work to accelerate the settlement cycle.

This level of participation alone is a very clear signal of the industry’s support for the move to T+1. So, Tom, with that, what milestones have been reached since this effort began?

Tom Price: That’s a good question. And thanks, Ken. After we committed to supporting to accelerate the settlement cycle to T+1, we formally initiated the industry engagement for the project in early 2021. As we did in transitioning the industry to T+2, we began working closely with our industry partners, namely DTCC and ICI on this project and of course, with industry participants, including a large group of SIFMA members, their input and guidance has been critical.

As a starting point in 2021, we convened our working group to complete an in-depth analysis on the next steps to achieving T+1. As part of that work, we determined which areas would need to undergo substantive changes to move to T+1, along with the development and definitive timeframe that makes sense for market participants. In addition, we assessed what it would take to further accelerate the cycle beyond T+1.

The transition to T+1 would require a fundamental behavioral, technological, process and regulatory changes, and we knew this going into the project. As a first step, we identified substantive changes in the ecosystem related to a move to T+1. Again, understanding the full array of acts, products, markets, customers, technology and processes.

Based on inputs from market participants, The Industry Steering Committee determined that an ideal transition timeframe to be September 2024, just around Labor Day, which mirrors the timing of the moves on T+3 to T+2 in 2017.  To be realistic, an achievable timeframe could move to T+1 allows the U.S. to transition along with the Canadian markets. In December 2021, we published the report Accelerating the U.S. Settlement Cycle to T+1, which you can find on our website.

This is a tool that participants can leverage in doing their assessment and provides them a framework to look at their internal and external dependencies. In February, the SEC issued a rule proposal to accelerate the settlement cycle to T+1, reflecting many of the recommendations, including in our December report. We welcomed the SEC’s leadership in supporting the acceleration of the settlement cycle to T+1 via its proposal, which provides of regulatory certainty to market participants, which is critical. And then, the most recent milestone, we published the T+1 Playbook with DTCC, ICI and Deloitte.

Ken Bentsen: So our efforts to decrease risk in the system by accelerating the settlement cycle to T+1 are moving forward with input from the industry and support from our regulators. As impacted market participants began the process of updating systems and processes, we identified the need to provide them with a guide to follow as they develop their implementation plans for moving to a T+1 settlement in 2024 – and that’s what the Playbook is all about. Can you dig into the Playbook a little bit more for our listeners?

Tom Price: We’d be happy to Ken. It was developed really the Playbook was developed as a guide for market participants to help them identify areas impacted by shortening the settlement cycle and the considerations that should be addressed within their own company. Every firm has different infrastructures, businesses and clients, as well as operational processes and geographies, that will need to be taken into account.

It’s important to note that because the SEC’s proposal to shorten the settlement cycle is not yet final, the Playbook really serves as a guide to assist firms with the many complex steps involved in the move to T+1. We’ve referred to it as a living document where this document will continue to be updated when new issues develop and when we get a final word from the SEC.

The Playbook assumes a third quarter 2024 transition, and of course that is subject to regulatory approval. And it may be updated, as I suggested earlier, as the regulators select this transition date. This is a complex ecosystem that requires full industry participation, with the support of regulators working together to make an efficient, effective and risk-free transition to a T+1 settlement cycle.

Ken Bentsen: So Anthony, how is the Playbook structured?

Anthony Macchiarulo: Sure, Ken. So the Playbook consists of 14 sections. Two sections provide overviews of the previous move to a T+2 settlement cycle and the approach for the latest Playbook. Eight sections will explore specific areas of the trade lifecycle, including trade processing, asset servicing, documentation, securities lending, prime brokerage and funding and liquidity considerations. The remaining sections outline matters related to regulatory changes, global impacts, primary offerings, buy-side considerations, industry testing and migration plans, as well as the associated resources needed for market participants to prepare for the transition to T+1.

Ken Bentsen: That’s very helpful. So, Tom, what are the next steps?

Tom Price: Well, the easy part has been done. Identifying the key initiatives of developing the Playbook. But really, what we need to do is continue to work with our members in the broader industry on accelerating the settlement cycle, refining the Playbook as needed, identifying additional issues that will need to be embedded in the Playbook as a guide for our members to update as we get final rule sets from the Commission, and not only the Commission. There’s other corresponding rules from the MSRB, from FINRA and other regulators also need to be changed to align to a shorter settlement cycle, and then really the whole process of education. The Playbook and the materials we put out really are guides for the industry to use, SIFMA members and others, as a resource, as an educational document, and for them not only make the system changes internally that they need to, but also deal with their external clients and counterparts and also with infrastructure providers and service providers. So there’s a lot of work still to be done here, but it’s a slow and steady process. We’re really excited about the opportunity to continue to push forward, take risk out of the system on behalf of the industry and our members.

Ken Bentsen: Well, Tom and Anthony, thank you for walking us through the T+1 work and highlighting the Playbook and it’s usefulness for the industry.  Also, I want to thank all of our listeners for joining us today on this discussion of the T+1 Playbook. To learn more about SIFMA and our work for more effective and resilient capital markets, please visit us at www.sifma.org and access the Playbook and other documents related to the move to T+1 please visit the resource section of our website.

 

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Kenneth E. Bentsen, Jr. is President and CEO of SIFMA. Mr. Bentsen is also Chair of the International Council of Securities Associations (ICSA), Co-Chair of the British American Finance Alliance (BAFA) and Chairman of Engage China.

Thomas F. Price is Managing Director, Technology, Operations and Business Continuity at SIFMA.

Anthony Macchiarulo is Senior Associate, Financial Services Operations at SIFMA.

 

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