The US market is gearing up for a transition to T+1 securities trading in a move that will have wide-sweeping implications for investors and financial service providers across the world.
Last week a collective of US industry bodies and market infrastructure giant, The Depository Trust & Clearing Corporation (DTCC), published a detailed plan revealing how various providers in the investment chain will need to adapt to faster processing times slated to go live at the back-end of 2024.
Produced by DTCC in partnership with the Securities Industry and Financial Markets Association (SIFMA) and the Investment Company Institute (ICI), the ‘T+1 Securities Settlement Industry Implementation Playbook’ includes a step-by-step guide for firms involved in trade processing, asset servicing, documentation, securities lending and prime brokerage while also describing probable funding and liquidity effects of the prospective US trading upgrade.
The joint-industry publication also lays out expected regulatory changes, buy-side issues as well as the potential impact on global investment firms that deal in US securities.
According to the Playbook: “The move to a T+1 settlement cycle will impact organizations across the financial services industry and throughout the trade lifecycle. Impacted market participants include issuers, asset managers… broker-dealers (retail, institutional, and prime brokerage), global custodians, vendors, service bureaus, transfer agents, exchanges, clearing firms, buy-side firms, and depositories.”
Investment funds, especially exchange-traded funds, will have to update processes to adapt to faster-trading, the report says.
While the T+1 switch-up is primarily aimed at improving domestic industry efficiencies, any prospective trading time tweaks would put the US out-of-synch with most other global markets, the report says.
“… the move from T+2 to T+1 now creates a significant misalignment scenario for the U.S., as many international markets will remain at T+2 with no current announced plans to accelerate the settlement cycle. Canada is accelerating its settlement cycle to T+1 along with US,” the Playbook says.
India has already moved to optional T+1 trading times, the report says.
The US Securities and Exchange Commission (SEC) issued regulatory proposals to underpin a faster US securities trading environment this February following industry groundwork dating back to 2020.
In a release DTCC et al said: “Every firm has different infrastructure, businesses, and clients, as well as operational processes and geographies that need to be taken into account. It is important to note that, because the SEC’s proposal to shorten the settlement cycle is not yet final, the Playbook serves as a guide to assist with the many complex steps involved in the move to T+1.”
Among a raft of benefits, the report says faster trade times reduce market risks – especially during periods of high volatility – while lowering liquidity requirements and creating “capital and operational” efficiencies.
Technically, US markets could shift to almost instantaneous settlement, however, the new guide says T+1 still allows end-of-day “netting” of trades that “significantly reduces the volume of securities and money required to be moved across markets” on any day.
Michael Bodson, DTCC chief, said in the release: “The Playbook provides a robust strategy and plan for market participants to follow to prepare for the move to T+1.
“The Playbook reflects the experiences and lessons learned during the seamless transition from T+3 to T+2 in 2017, and we are confident it provides a clear and defined roadmap to further accelerate the settlement cycle in the most efficient manner possible while mitigating risk.”