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The Move to T+1:  The Final 30 Days

In this episode of SIFMA’s podcast, Kenneth E. Bentsen, Jr., SIFMA’s President and CEO, and Tom Price, Managing Director of Technology Operations and Business Continuity, discuss the final days leading up to the transition to T+1 day settlement. They review the industry’s readiness for the transition, the history of settlement cycles, and the benefits of T+1. They also highlight the resources available and the importance of communication during this transition.

Transcript

Edited for clarity

Ken Bentsen: Thank you for joining us for this episode in SIFMA’s podcast series. I’m Ken Bentsen, SIFMA’s President and CEO. I’m joined today by my SIFMA colleague, Tom Price, Managing Director of our Technology Operations and Business Continuity team to talk about the final days leading up to the transition to T+1 day settlement. On May 28th, in the United States, the standard settlement cycle for most broker-dealer transactions and securities will shorten from two business days after the trade day, T+2 to T+1. There’s much to talk about so let’s jump right in. Tom, thanks for joining us. So we are now under 30 days until the May 28th implementation date for T+1 settlement. The question on everyone’s mind right now is will we be ready? Overall, how would you describe industry readiness?

Tom Price: Thanks, Ken. And this has been some journey. I got to tell you, firms have really been working diligently on being ready for the transition to T+1 happening this spring, May 27th for Canada and May 28th in the U.S. The deadline has been set by the Securities and Exchange Commission, and firms are doing the work they need to in order to comply by meeting the timeframes and requirements. I’m co-chair of the Industry Steering Committee leading the transition efforts with our partners, and I can tell you we are ready.

This is a complex undertaking which requires a degree of diligence and coordination. The industry is connected through counterparties and service providers, so to a large extent, we’re dependent upon each other. So the communications, planning, and execution of a project that’s significant requires and is dependent on industry-wide coordination. We’ve been working on this for quite some time, and we are getting close to the membership on this issue, very close to the membership on this issue.

So we have a good handle on where our members are in the process. We’ve been doing a number of surveys to assess readiness starting last summer and into the fall and throughout most recent days. The survey results are very positive. The firms are saying that they are ready and they don’t foresee any major issues. So I think we’re in a pretty good place at this point. But Ken, let me, I would maybe ask you a question. I think it would be useful for our listeners if we back up a bit and give some context about how we got to T+1 settlement. It wasn’t that long ago that we were at T+2 Perhaps you can walk us through that.

Ken Bentsen: Thank you for that, Tom. That’s a good idea. You know, if you go back to 2014 after extensive analysis, the industry really going on for a few years even before that, but by 2014 the industry endorsed a move from T+3 to T+2 and of course, keep in mind, and you know this well, you and I have both been around for a while, you know, that the industry went from T+5 to T+3 back in, I want to say, around 1995, 1996. But in any event, 2014, the decisions made to go from T+3 to T+2. The T+2 Industry Steering Committee was led by DTCC, ICI, and SIFMA and comprised of 20 participants across key market segments as the governing body for the T+2 effort. You were obviously part of that at that time. The industry identified September 5, 2017 as the target transition date after robust analysis over Labor Day weekend of that year. Regulators proposed and finalized rule changes to facilitate T+2 Internal service provider and industry-wide testing hosted by DTCC was carried out to address the technical changes needed to shorten the settlement cycle, which was successfully carried out on the target date. In 2020, as part of an ongoing efforts to decrease risk in the system, SIFMA and the same industry partners started discussions late that year, in the third, fourth quarter of that year, and formally initiated the effort to accelerate the settlement cycle to T+1 in early 2021. By February 2022, the SEC issued a proposal to accelerate the settlement to T+1 and that proposal was adopted as a final rule the following year. So that’s how we got to where we are today.

Tom Price: Yeah, no doubt. And I think you touched on it really has been an industry wide initiative with all various different participants like DTCC, ICI as partners in this. So that’s great. So twice now, or actually it’s three times if you include the transition to T+3 back in 1995, the industry and SIFMA have led the acceleration of the settlement cycle. And so why? What are the benefits?

Ken Bentsen: Yeah, I think that’s really important. There are numerous benefits, including those to investors, to be realized by reducing the credit market and liquidity risk and securities transactions faced by market participants. First and foremost is reducing risk in the system. That’s the main reason for accelerating the settlement cycle. But simply, fewer days from trade to settlement means lower risk. And also there’s a benefit to streamline operations and to realizing greater efficiencies and making our operational systems more modern and resilient. And, you know, for example, you know, faster settlement means decreased daily average capital requirements and firms can put that capital to better use elsewhere in the financial system. And it increases liquidity in the system.

But for all those positives, as you know better than both, Tom, it’s not easy to do. And when you’re going from three to two, you’re taking a third out. When you’re going from two to one, you’re taking half the time out. So there’s a lot that has to be done to get there. So since you’ve been leading this effort, as close to this process as anyone in the country, frankly. What are the steps to readiness and what has been done and what remains to be done?

Tom Price: Yeah, that’s a good question. I think you’re right, Ken. It’s all about risk reduction in the system. So the industry has been working diligently with precision to prepare itself for this transition. It is a complex and complicated initiative, but well worth it to realize the benefits for investors in the industry. The key here, as you highlighted, is the reduction of risk in the system. We’ve been working closely with our industry partners as well as our members, regulators, and other market participants.

Basically the value chain of entities involved in settling trades, on first identifying and then executing the steps necessary to achieve T+1 on May 28th, the regulatory mandated transition date. Again, I think it’s important to emphasize that this change impacts a significant number of securities, products, and market participants. SIFMA has been leading a working group of well over 900 members, including buy-side and sell-side firms, as well as a smaller subgroups on a variety of issues related to the change. This has been instrumental in ensuring industry preparedness and inclusion. These working groups helped inform discussions on the policies and procedures options, same-day affirmation requirements, and record-keeping aspects of the SEC rule.

SIFMA, DTCC, and ICI issued a playbook, a roadmap to accelerated settlement, which outlines a detailed approach to identifying the implementation activities, timelines, dependencies, and risk impacts that market participants need to consider as they prepare for the transition. These playbooks provided members with tools to assist them in first the analysis and then the execution of their project management teams. DTCC has issued a detailed testing framework its members can use to test changes and the move to T+1 with DTCC and other industry infrastructure providers and has engaged in regular testing with the industry. I think they’re into 20 or so testing regimes that they’ve initiated already. SIFMA has held and the industry partners have held numerous working meetings to understand where more work needs to be done and how to address any issues that have arisen, all to ensure a smooth transition. So at this point, truly the last mile, members should be continuing to work through their programs, understanding the timing changes, the impact of funding and financing, FX, ETFs, and certainly continued communication with your counterparties.

Ken Bentsen: So, you know, I mean, when you think about it, obviously, you know, this is no small undertaking, right? This is the U.S. is the largest capital markets in the world by a long shot, which is a good thing. But we are really, this is literally talking about turning the aircraft carrier. And there’s a lot that has to be done. Where are the areas that are needing more work? What are the areas that are most concerned to you?

Tom Price: It’s a good question with 30 days left, right? In all the work we’ve been doing, it’s clear that we, I mean SIFMA members and the industry partners are very close to ready and we’ll be there by the implementation date. But what about some of the other counterparties in the system? There’s really an area of focus for us, mainly small asset managers, perhaps smaller broker dealers, smaller vendors that support the infrastructure. There is some concern around smaller participants’ readiness to make the transition.

Another big focus, in addition, is to some of the smaller participants in the international marketplace and investors in Europe being able to meet the compressed timelines. How do we address that? The big takeaway from all of this is communication. It’s critically important with these types of events to continue to communicate that we’re moving into a T+1 world and to help everyone be prepared to get there. That has been our motto from the beginning. No firms should be left behind. So it requires continued alignment of resources, communication, and inclusion. Ken, we’ve been through this before. What would you say makes the move to T+1 different from the move to T+2?

Ken Bentsen: Well, you know, as we were discussing, I mean, these are multi-year efforts, right? And if I think about, you know, going to five to three, I frankly had just stepped out of the industry to go into government at that point in time, but, you know, that was a – the world was a different place in 1995 than it was when we got to, you know, 2014 and then 2017 when we executed the – moving from three to two. And again, you led that effort with our partners and that was a major undertaking even then, because even though over the 22 year period, you know, markets had changed, technology had grown exponentially, its enhancements, but still, you know, we saw there was still a lot of checks in the system, a lot of paper in the system compared to where we are today in, you know, 2024.

But even so, and as we discussed when the industry started looking at this at the latter part of 2020, and thinking about what we learned from getting from three to two again, three to two we were taking a third of the time out. two to one we’re taking half the time out. So your margin for error is shrunk dramatically. So that takes a lot. Watching the work that you and our partners have been doing with the members, there are a lot of issues that have had to be resolved, a lot of discussions, particularly with the SEC, but with our regulators.

And then, of course, we’re going to have to look back in 2017, the U.S. was following other jurisdictions. Other jurisdictions had already moved to two while the U.S was still at three. This time, you know, we and the U.S, along with our neighbors to the north and south, Canada and Mexico and India as well, but are ahead of Europe and much of Asia at this point in time situation with other jurisdictions with a longer settlement cycle. We have a lot of cross border products that are affected by this. I know you and your team are working through that. And we expect the other jurisdictions to move at some point in time. But it’ll be a couple of years before that happens. And again, we’re not taking a third of the time out, we’re taking half the time out. So that’s a big deal. But Tom, you mentioned a lot of things throughout our discussion this morning. Can you summarize the resources that are available as the industry heads down the final stretch?

Tom Price: Yeah, Ken, and you make some great points. I mean, if we think about accelerating the settlement cycle, we’ve been talking about going to T+1 for 29 years, when stocks were trading in fractions, before Y2K, before Reg NMS. I mean, so it’s been quite a journey. And the key thing here really is, how do you make sure that the data upfront prior to the trade is correct so you’re not dealing with fails after the fact. Right, so I think the big focus is automation. We have little room for error, and a lot of those discussions will continue after we make the transition as well. But to your point, what’s available? What kind of resources? Well, the SIFMA T+1 Playbook is a great resource for understanding what you need to do and to use as a checklist for what remains, what work still remains to be done.

DTCC’s T+1 conversion guide is also a valuable resource that folks should be looking at as they prepare for the end of this journey. The guide outlines the timing changes and the impacts on products and markets, so I think that’s a valuable resource. In addition, SIFMA will be standing up our command center, which will be operational for the transition weekend going to Memorial Day and through the following week post transition. And then the command center will provide conversion status information, transparency in the activity of key participants, and serve as a forum for issue identification and socialization. So we have that apparatus set up. We’re ready to kick that off on Friday, May 24th, which is after the close when the transition really initially gets kicked off. That’s where we are.

Ken Bentsen: As here we are in the final stretch, what will the industry be doing from now through the effective date, particularly between now and until when, you’re set up in the command center, leading up to May 28th?

Tom Price: Yeah, good question, right? So each entity should be checking its readiness against where it needs to be on May 28th and addressing any outstanding items. Focus on same-day affirmation. Focus on your policies and procedures. Test, test, test against the DTCC. That test environment is open. Test against your counterparties. Test against your service providers. Communicate with your counterparties and vendors. Make sure you’re tracking affirmations. Have your policies and procedures in place. That may be redundant, but there’s a reason for it, because it’s important it’s part of the SEC rule. Engaging with the T+1 Command Center, while each firm is responsible for its conversion, the Command Center will provide a forum for the industry to raise and socialize broad industry issues that are beyond the scope of firm-specific challenges. They’ll be able to provide updates and work with appropriate parties to determine any additional steps, if required.

Ken Bentsen: So, this, I can’t overestimate the importance of that work. And we’ve seen you and your team and other instances set up similar things to the command centers to when we’ve had BCP issues, when we’ve had, think about the March 2020, when the markets, had an extraordinary number of fails and really stepping in. But here you’ve got, like we had back in 2017, you’ve got a glide path. And so this is not a super storm sandy, let’s get set up and go. Because you don’t know when it’s going to happen. But here you do. So maybe functionally tell us what happens. You’ve got the command center and you’re bringing the plane in for a landing or bringing it into port on May 28, what’s going to happen?

Tom Price: So May 28th will be day one in settlement, right? That means sellers could expect faster payment following the sale of an impacted security, and buyers were required to provide the funds more promptly following the purchase of an impacted security. So effective May 28th is our first T+1 settlement date. So May 29th will be the double settlement date, so trades that took place on Friday, May 24th will still settle on T+2, and because Monday is a holiday, they’ll settle on T+2 on that Wednesday. So, meaning that trades take place on Tuesday, May 28th, will be the first one to settle on T+1, which will also be on that Wednesday. We would call that a double settlement date. The command center will be open for industry communications in the days leading up to the conversion, as well as the days following. A single line will be open for industry communications.

We’ll be monitoring and tracking the status as we approach and work through the first days of T+1 settlement. We’ll have various different infrastructure providers participate in those calls. We’ll have the Canadian Markets Association participate in those calls as well. So we have key infrastructure that our members depend upon providing an update. It’s our expectation based on the significant preparation and the recent responses from firms that this will be a smooth transition. We are ready.

Ken Bentsen: So Tom, thank you for this information. And we know where you’ll be over Memorial Day weekend with your team. We’ll make sure that you’ve got plenty of hot dogs and hamburgers because we know you won’t be spending any time on the beach, but you’ll be working hard on behalf of the industry. And we thank you and your team for that, and our partners at DTCC and ICI. And I want to thank all of you for listening today to learn more about the transition to T+1 and SIFMA in our work to promote effective and resilient capital markets, please visit us at www.sifma.org and likewise, you can access the T+1 website by visiting www.ust1.org. And thank you for being with us today.

Tom Price: And thank you, Ken, for your leadership and support. Thank you very much.

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Kenneth E. Bentsen, Jr. is President and CEO of SIFMA. From 1995 to 2003, he served as a Member of the United States House of Representatives from Texas. Prior to his service in Congress, Mr. Bentsen was an investment banker specializing in municipal and housing finance.

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

 

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