Can the securities industry deliver T+1 in T-minus 15 months?

What is happening?

In February, the US Securities and Exchange Commission (SEC) finalised its rules to shorten the standard settlement cycle for most US securities transactions from the current T+2 cycle (two days after trade date) to T+1. The SEC has set May 28, 2024 as the implementation deadline for the shift.

The change has been mooted for several years. The SEC published its proposals in February last year and industry groups began discussions about such a shift with their members in 2020. However, the SEC’s chosen deadline has caused some upset within the industry given the scale of changes and testing that will be required to ensure a smooth transition.

Taking into account the compressed timeframe for transaction processing, as well as the SEC’s expressed desire that there should be greater levels of straight-through processing, firms will need to significantly adjust their processes, in particular introducing much more automation. This will, in many cases, require major system upgrades.

Why is it happening? 

The market volatility of March 2020, when the Covid-19 pandemic really began to take hold, put the securities settlement architecture under significant pressure, including in the US. Although markets continued functioning, firms faced higher and more frequent margin calls from clearing houses to reflect the greater risk of failed transactions, creating liquidity challenges at individual firms and across the market more broadly.

The securities settlement cycle for US securities had already been shortened in 2017 from T+3 to T+2 on the basis that it reduced market risk and lowered margin requirements. In the wake of the 2020 volatility, industry-led discussions began about the possibility of a further shortening to T+1.

Further momentum for the change built up following the meme stock market disruption of early 2021, when the settlement infrastructure once again came under severe pressure and this time also caught the attention of the wider public and policy-makers.

What do the bankers say? 

The US securities industry is broadly supportive of the shift itself, but some feel the deadline the SEC has chosen is too soon. The Securities Industry and Financial Markets Association (Sifma) had called for an implementation date of September 2, 2024, matching the planned go-live date for T+1 settlement in Canada (although there has since been suggestion Canada will shift its implementation to match that of the US) and providing extra time for testing. In response to the SEC opting for May 28, Sifma CEO Kenneth Bentsen suggested it was “rushing the implementation for no apparent reason”. Even within the SEC itself there was some dissent, with two out of five commissioners – Hester Peirce and Mark Uyeda – voting against the rule change because they felt the implementation deadline was too early.

All international firms trading in US securities will also need to comply with the rules and it is arguably even more difficult for them because they are often operating in a different timezone. They have little choice other than to get on with it. In any case, it seems likely that other major jurisdictions will follow suit in the coming years: in the UK and Europe there are already working groups examining a potential shift to T+1

Will it provide the incentives? 

It is a matter of mathematical logic that with a shorter trading cycle at any given time there should be fewer outstanding transactions in the system, and therefore lower levels of risk and, as result, lower margin requirements.

In its February 2021 white paper on shortening the settlement cycle, DTCC, the lead US provider of settlement services, suggested that T+1 could lead to a reduction of up to 41% of the volatility component of margin requirements (typically the largest portion of margin requirements for an individual firm). The acid test will come during the next period of significant market stress.

The increased automation that T+1 will necessitate is also likely to be beneficial for both firms and broader market stability in the long run, despite any short-term challenges in introducing it.

If the industry is able to achieve T+1 in an orderly manner by the end of May 2024, then current worries about the feasibility of the deadline are likely to be quickly forgotten. However, by opting for an earlier deadline in the first place, the SEC has arguably sacrificed industry goodwill at a time when much of its broader agenda is already ruffling feathers.

• Read more Reg Rage.