Post by Tan Guo Jian, Product Manager

US SEC T+1 SETTLEMENT TO BE IMPLEMENTED ON 28 MAY 2024.
ARE YOU READY FOR THE CHANGE?

On February 15, 2023, the U.S. Securities and Exchange Commission (SEC)  announced changes to shorten the standard settlement cycle for securities transactions to T+1, effective May 28, 2024. The SEC believes that this change will improve liquidity and reduce systemic risk in the markets.

SEC Chair Gary Gensler said, “I support this rulemaking because it will reduce latency, lower risk, and promote efficiency as well as greater liquidity in the markets.” He added that the change is one of four recommendations made by the SEC staff in response to the meme stock events of 2021.

The shorter settlement cycle will also improve the processing of institutional trades. Broker-dealers will be required to either enter into written agreements or establish, maintain, and enforce written policies and procedures to ensure that allocations, confirmations, and affirmations are completed as soon as technologically practicable and no later than the end of the trade date.

However, there are a number of issues that need to be addressed before the T+1 settlement cycle can be implemented. For example, sell-side firms will need to adjust their post-trade processing to ensure that trade allocations are completed by 1900 EST and confirmations and allocations are made by 2100 EST on the trade date. This may be challenging for counterparties outside of the US Eastern time zone, which will have less than one business day for post-trade processing and any potential issue resolution.

In addition, it is unclear whether custodians and other outsourced third-party providers are ready to support the T+1 settlement cycle. The SEC is working with these firms to ensure that they have the necessary systems and procedures in place.

Overall, the T+1 settlement cycle is a positive change that will improve the efficiency and safety of the securities markets. However, there are a number of challenges that need to be addressed before it can be implemented successfully.

Artius Global’s Thoughts

Two key takeaways from the SEC’s T+1 settlement rule:

  • Regulatory disclosure requirements, such as Shareholding Disclosure (currently T+2), will need to be synchronized with the T+1 settlement cycle. This is because the purpose of regulation is to provide governance and oversight, and it is important for regulators to have timely information about market activity.
 
  • Most financial institutions are not prepared for T+1 settlement and will need
    to make significant operational changes. 
    This means moving away from manual processes and outdated technology, and towards more automated and efficient systems.
    Every manual intervention in the workflow increases the risk of settlement delays, and there is little room for error in a T+1 environment, especially for clients in Asia where the time to settle is even shorter.
 

With the UK and EU also considering moving to shorter settlement cycles, the question is whether the world is ready to shift to T+0 settlement.

The SEC is continuing to assess the feasibility of T+0 settlement, and it is looking increasingly likely that it will become a reality in the near future.

Companies may have to rethink their resourcing, processes and systems to comply with the new regulatory requirements. The use of technology to automate shareholding disclosure is a compelling one.

Connect With Us

For those wanting more information, feel free to contact us or drop us a note directly at enquiries@artiusglobal.com.

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