Equity prices

The SEC has added its support to the move from a T+2 to T+1 settlement cycle in 2024. And while T+0 remains on the table, a wholesale move has been deferred for now. Marie Kemplay reports.

Last month, the US Securities and Exchange Commission (SEC) voted unanimously in favour of shortening the standard clearing and settlement cycle for US securities from the current two business days from trade (T+2) to one business day (T+1).

Proposing rule changes to back the shorter cycle, SEC chair Gary Gensler commented: “These proposed amendments to the securities clearing and settling process, if adopted, could lower risk to the financial system and drive greater efficiencies in the markets … As the old saying goes, time is money.”

The changes are not only important in increasing efficiency, proponents argue, but are also likely to have several other substantive benefits. Michele Hillery, general manager of equity clearing and DTC settlement service at the Depository Trust and Clearing Corporation (DTCC), the firm responsible for settling most US securities transactions, says: “There are a lot of industry-wide benefits that will come with T+1, including reducing risk, lowering margin requirements and improving capital liquidity – all of which can be achieved while also maintaining the resilience and soundness of the US capital markets.”

Market volatility

Market infrastructure has been under the microscope in recent years following two notable periods of market volatility. First, in early March 2020 as the Covid-19 pandemic took hold globally, there were unprecedented levels of trading activity and volatility. At the peak, on March 12, the DTCC processed more than 363 million equity transactions, a new single-day record and 15% higher than the previous peak of 315 million transactions in October 2008, at the height of the financial crisis, and more than twice a typical day’s trading volume.

More recently, in January 2021, volatile trading activity around several so-called meme stocks, most notably shares in GameStop, grabbed the headlines. Some brokers, including app-based broker Robinhood, restricted GameStop share trading on a temporary basis, citing market volatility and increased clearing house margin requirements.

Although in both instances there were no systemic issues, these events did serve to illustrate the importance of well-functioning settlement architecture and processes, and prompted questions about whether risks could be reduced with a shorter cycle. In the SEC’s release summarising its proposed rule changes it observes: “These two episodes have highlighted potential vulnerabilities in the US securities market that shortening the standard settlement cycle could help mitigate.”

In its February 2021 whitepaper ‘Leading the industry to accelerated settlement’, the DTCC also observed: “Without question, the market volatility caused by the Covid-19 pandemic has reinforced the criticality of increasing automation and resiliency in the financial services industry, eliminating any remaining inefficient and manual processes, increasing the overall scale and speed of processing, reducing risks and lowering costs.”


Some have called for the industry to go even further and introduce T+0 (settlement at the end of the same working day) or even real-time settlement. The latter, in particular, would require a fundamental change in how trades are processed, and seems unlikely to be brought in anytime soon. A large part of the reason for this is that it would make the current practice of ‘netting’ by clearing houses such as the DTCC’s National Securities Clearing Corporation (NSCC), that is, calculating the net amounts receivable and/or payable by counterparties across all transactions during a trading period, very difficult, if not impossible.

Netting significantly reduces the number of securities and capital transfers that counterparties need to make, reducing costs and reducing risks, so there is little industry appetite to shift to an arrangement under which each individual trade would need to be settled in real-time. The NSCC estimates that: “As a central counterparty [CCP], we net trades and payments among our participants, reducing the value of payments that need to be exchanged by an average of 98% each day.”

There are a lot of positives for T+1 and it avoids the complexities that would occur if we were to move to T+0 at this time

Michele Hillery

T+0 is thought to be a more realistic goal, because netting could still take place, albeit within a shorter timeframe. Indeed, the SEC’s proposals make explicit reference to “actively assessing” whether the settlement cycle should be reduced to T+0, as it believes this could be beneficial for investors. It states that although it is not seeking to mandate T+0 at this time, it is keen to understand what challenges would need to be addressed in order to clear the way for its broad adoption. T+0 settlement is already technically possible, and the DTCC does already support many transactions on this basis, but it is not standard and trades are not offered on a netted basis. Ms Hillery says: “There are a lot of positives for T+1 and it avoids the complexities that would occur if we were to move to T+0 at this time.”

More risk, without benefits

There is certainly some industry concern about moving wholesale to T+0. Writing in a recent entry on the Securities Industry and Financial Markets Association (Sifma) Pennsylvania + Wall blog, Kenneth Bentsen, Jr, CEO of Sifma, a US trade body representing broker-dealers and asset management firms, comments that, following industry engagement alongside the DTCC and the Investment Company Institute (ICI), “In the case of T+0, our group found that the law of diminishing returns applies: shortening the settlement cycle beyond one day embeds more risk without creating additional benefits available for widespread adoption across the industry.”

The blog post identifies several specific challenges related to moving to T+0, such as reduced time available for fraud and cybercrime checks, incompatibility with current securities lending practices and, challenges for investors such as retail investors or foreign investors who at present are able to submit payment after placing orders, but under a T+0 system may need to pre-fund their accounts. The overarching message is that operational processes and trade flows would need to be substantially reworked under a T+0 settlement cycle without, the post argues, substantial benefits.

Groundwork for further shortening

Nonetheless the shift to T+1, in the manner proposed, does appear to lay the groundwork for a future shift to T+0, if the industry and/or regulators decide to move in that direction. Sifma, DTCC, ICI and Deloitte published an “industry roadmap” in December 2021 outlining recommendations for how the industry can deliver the transition to T+1 by the first half of 2024. The paper was based on the work of an 800-strong industry working group during the second half of 2021, where a range of calls and remote working sessions were held to evaluate risks and challenges, and develop a framework to move forward.

Ms Hillery says: “We issued our whitepaper in February last year, and then in the second half of the year we, along with Sifma and ICI, hosted many calls and industry-wide discussions, where market participants had the chance to provide feedback. There was really strong engagement and the market is supportive. The playbook for T+1, which DTCC, Sifma and ICI issued in December 2021, is reflective of the industry’s feedback and thoughts on the move.”

More automation and standardisation

Key recommendations include bringing forward allocations and affirmations deadlines (the communications between counterparties, often via a central counterparty, which confirm the details of the trade made), adopting technology to automate communication and digitising trade documentation and its transmission.

The paper points to the potential for the transition to T+1 to deliver increased levels of automation and industry standardisation, which would support greater adoption of straight-through processing. This is significant, as the SEC proposals would “require affirmations, confirmations, and allocations to take place as soon as technologically practicable on trade date” and that “the proposed rule would require new policies and procedures directed to straight-through processing”.

The SEC is now consulting on its proposals, suggesting March 31, 2024 as the go-live date for T+1 as the new standard settlement cycle. Ms Hillery says that the industry working group led by Sifma, ICI and DTCC will continue its work throughout 2022 and 2023, ahead of the expected transition during the first half of 2024, and is positive about what the long-term impact of this work will be. “T+1 will really set us up well for an easier transition to netted T+0, should the industry want to pursue that in a wholesale way, with developments in standardisation, the introduction of greater levels of automation and decreasing of manual processes,” she says.


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