Broker-dealers and other participants in the securities industry are preparing for a regulatory change that will speed up the trade settlement period, meaning firms may have to adjust operational workflows, edit their technology or adopt new platforms to meet regulatory requirements.
Earlier this year, the Securities and Exchange Commission finalized rules to shorten the settlement cycle — the time from trade execution to when a trade is final — from two business days after the trade date (T+2) to one (T+1). Next month, banks, broker-dealers and investors, among other participants, will begin testing their changes to see how they comply with the compressed timeline, which goes into effect in May 2024.
The updated rules will impact the whole industry, which will need to act in tandem to hit T+1, but the amount of changes will vary from firm to firm. John Abel, executive director of clearance and settlement product management at the Depository Trust and Clearing Corporation, said that T+1 is a significant industry change, and will require most firms to alter their workflows, along with making changes to their technology.
"We've agreed as an industry that these are the right time frames," Abel said. "Now it's up to each individual firm to figure out how to make it happen. There is some time that can be taken down just by processing efficiency. ... In other cases, it's about really fundamental changes and looking at some of the industry solutions that exist."
Abel, who has been DTCC's point person on shortening the settlement cycle, said that he believes most of DTCC's members, mainly banks and broker-dealers, are pretty far along in their T+1 preparation, and will be ready when testing starts August 14.
According to research from the Depository Trust and Clearing Corporation released in March, 65% of industry participants said that dependencies on legacy technology and executing on system changes were slowing or blocking progress to meet T+1. The report also showed that system replacement and standardization made up about 25% of project activity for broker-dealers and custodians.
The migration to T+1 is likely to accelerate industry adoption of straight-through processing and the automation of certain procedures.
Vinod Jain, a strategic advisor on the capital markets team at the research firm Aite-Novarica, said he thinks the shift is an opportunity for firms to be creative about how they find ways to cut down processing time. He said that while the changes may be robust, he thinks the transformation will be more operation-focused as opposed to technology-focused.
"The beauty about this transformation project is that everybody has to be creative on it," Jain said. "You have to approach it differently. You have to speak to many, many stakeholders, and join all that together to identify and question the assumptions to find the problem, and then the solution."
Brian Steele, co-head of market structure solutions for global banking and markets at Goldman Sachs, said that the bank, and peers, has been working on enhancing its settlement cycle efficiency for several years, but the regulation offered a firm deadline. Specifically, Steele said Goldman has invested "pretty significantly" in matching, shaping and allocation infrastructure that allows the bank to connect with clients' trade data across various platforms and formats.
The company is adding fixed income securities to its offering while interest rates rise and the U.S. equities market continues to modernize
Broker-dealers, like Goldman Sachs and other banks, will also be required by the SEC rule to ensure that their clients, which include investment advisors and custodians, are completing allocations, confirmation and affirmations, "as soon as technologically practicable," and no later than the end of trade date, so that the trade can be finalized the next day.
"One of the biggest areas of focus for the firm is actually the thousands of clients that we need to engage with to ensure that they make the necessary changes in their systems, their infrastructure, their workflow and, in some cases, invest in industry platforms that help facilitate the electronic transfer of data to help us meet this new T+0 rule requirement," Steele said.
Currently, the deadline to allocate trades is 11:30 in the morning on day after execution. The trade-date allocation deadline is especially challenging for international firms, which don't operate on eastern time.
Innovation in trade settlement technology is a continuous, global effort. Last fall, the Society for Worldwide Interbank Financial Telecommunications
Steele added many of Goldman's client firms and industry participants are adopting technology from third parties, including fintechs, to meet the regulatory requirements. In 2018, several major banks
Jain said he hasn't seen many instances of new fintechs being developed to cater to T+1 requirements, but that existing companies and technologies are enhancing their platforms.
Testing T+1 with DTCC's subsidiaries — Institutional Trade Processing, National Securities Clearing Corporation and the Depository Trust Company — and Cboe and Nasdaq begins August 14, and will be conducted in biweekly cycles.
