{"id":12211,"date":"2023-10-12T12:59:03","date_gmt":"2023-10-12T12:59:03","guid":{"rendered":"https:\/\/iqeq.com\/?p=12211"},"modified":"2023-10-12T12:59:12","modified_gmt":"2023-10-12T12:59:12","slug":"t1-settlements-a-new-era-for-u-s-securities-transactions","status":"publish","type":"post","link":"https:\/\/iqeq.com\/insights\/t1-settlements-a-new-era-for-u-s-securities-transactions\/","title":{"rendered":"T+1 settlements: a new era for U.S. securities transactions"},"content":{"rendered":"
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Securities trading in the U.S. is on the brink of a massive transformation \u2013 one that will see transactions settle faster than ever before, and one for which firms must be prepared and equipped. <\/strong><\/p>\n

The U.S. Securities and Exchange Commission (SEC) has adopted a pivotal rule in response to the market turbulence witnessed during the meme-stock frenzy of 2021. Effective May 28, 2024, this new rule will come into effect, shortening the settlement cycle for all U.S. transactions settled through the Depository Trust Company<\/a> (DTC) from T+2 to T+1. (Canada has followed suit, implementing a similar rule on May 27, 2024.)<\/p>\n

The following are some of the implications of this change, its effects on the securities industry, and what firms must do to stay compliant.<\/p>\n

The evolution of settlement cycles<\/h2>\n

Before the era of electronic trading, physical stock certificates were delivered through traditional mail services. The SEC allowed up to five business days for security transactions to settle \u2013 dubbed the T+5 settlement cycle.<\/p>\n

But over the past 20 years or so, technological advancements have helped streamline the process. In 2004, the settlement cycle was reduced to T+3, i.e. three business days from the transaction date. In 2017, another leap was made, shortening it further to T+2.<\/p>\n

Market stresses in 2020, 2021 and early 2022 put a renewed focus on a possible move to T+1. In December 2021, for instance, an Industry Steering Committee (ISC) report determined that \u201cmoving to a T+1 settlement cycle will increase the overall efficiency of the securities markets, mitigate risk, create better use of capital, and promote financial stability, provided that the appropriate balance is achieved between increasing efficiencies and mitigating risk,\u201d according to the Depository Trust & Clearing Corporation (DTCC).<\/p>\n

And on February 15, 2023, the SEC amended Exchange Act Rule 15c6-1, which will move all security trades settled through the DTC to a T+1 cycle, effective from May 2024.<\/p>\n

Impacted securities<\/h2>\n

This rule change has wide-ranging implications, impacting a broad spectrum of securities. This includes most (if not all) equities, corporate bonds, ADRs, unit investment trusts, mutual funds, exchange-traded funds, options on equities, private-label mortgage-backed securities, and exchange-listed limited partnership interests. Click here for the full list<\/a>.<\/p>\n

It\u2019s important to note that swaps are explicitly excluded from this new regulation. And in practice, we believe initial public offerings (IPOs) will remain effectively exempted from T+1 settlement requirements.<\/p>\n

Trade matching timeline<\/h2>\n

Under the current T+2 cycle, trades must be matched by 11:30am Eastern Time (ET). Under the new rule, trades must be matched by 9 pm ET on the transaction date to be included in the DTC\u2019s \u201cNight Cycle\u201d. To be included in current settlement date processing, trades can be accepted up until 1:30pm ET.<\/p>\n

This change represents a significant adjustment for market participants, requiring them to adapt their workflows and operations to meet the new timeline. For instance, the DTCC points out that \u201cAsia now has one day to reconcile, but after the move, that will be reduced to as little as two hours, depending on market.\u201d<\/p>\n

Allocations and best practices<\/h2>\n

Firms are advised to allocate trades as promptly as practical, but by end-of-day on the transaction date at the latest. Best practices dictate that firms should complete allocations by 7pm ET on the transaction date to ensure they\u2019re ready for the 9pm trade matching cut-off.<\/p>\n

This proactive approach will ensure smooth and compliant operations under the new T+1 settlement framework.<\/p>\n

Key takeaways for market participants<\/h2>\n