T+1: Less than 12 months to go – What you need to know about the one-day settlement

The US Securities and Exchange Commission (SEC) changed the rules for the standard settlement cycle for securities traded on the secondary markets in the US. The rule change means the settlement date for transaction securities will be reduced from two days after the trade date to one day after the trade date.

This change from trade date plus one business day, also known as T+1, is expected to provide several benefits for investors and market participants, including reduced costs, increased market efficiency, and reduced settlement risk. This shortened period between execution and settlement of trades should reduce the number of unsettled transactions overall, the period of exposure to those outstanding trades and potential price movements in the securities underlying unsettled trades. It will also enable investors to access the proceeds from securities transactions sooner rather than later under the old model.

“Shortening the settlement cycle should reduce the margin counterparties would need to post with clearing houses,” said SEC Chair Gary Gensler.

What is T+1 and what is a settlement cycle?

T+1 refers to the trade date plus one business day for the settlement cycle. The settlement cycle is the time between the transaction being agreed upon and executed by a seller and buyer and the transactions being completed with the exchange of securities and cash. This is similar to buying in a supermarket.

Unlike the supermarket, between the trading and the settlement several checks and processes need to be completed to ensure a high degree of control for processing high volumes and values of securities transactions.

Following China and India, the US and Canada have moved to a T+1 cycle with a compliance date of 28^th May 2024. The settlement cycle has been reduced over the last few decades to match technology advancements and risk adversity. At the moment, it is unclear if Europe is going to join this trend. 

What does this mean for firms?

Default rule

The Exchange Act Rule 15c6–1 (a) requires most broker-dealer transactions to settle by T+1, subject to exceptions. The exceptions under the Exchange Act Rule 15c6-1(b) include security-based swaps, the compliance date is earlier than the May 2024 date. Earlier this month, the SEC announced the changes to security-based swap transactions. The changes are aiming to prevent undue influence over the chief compliance officer (CCO) and major security-based swap participants (SBS Entities). SEC Chair Gary Gensler said that “Given these markets’ size, scale, and importance, the Commission must protect investors and market integrity by helping prevent fraud, manipulation, and deception relating to security-based swaps. Today’s set of rules will do just that.

Firm Commitment Cash Offerings

The Exchange Act Rule 15c6–1(c) was retained in principle, with the firm commitment underwriting priced after the 4:30 p.m. EST settlement cycle changed from T+4 to T+2, shortening the default settlement cycle for these transactions.

Override provision

The override provision continues to be in place. It is still permitted for the parties to agree on a different settlement date.  

Same-day allocation and affirmations

The SEC has further added new requirements to same-day allocation and affirmations. Broker-dealers are required by Rule 15c6-2 to create and maintain policies and procedures that are logically created to guarantee that allocations, confirmations, and affirmations are completed as soon as technologically possible, but no later than the end of the trade date (or enter into contracts with institutional customers to achieve such same-day affirmations).

Additionally, Exchange Act Rule 204-2 under the Investment Advisers Act of 1940 mandates that advisers keep track of confirmations, allocations, and affirmations made to broker-dealers for specific securities transactions. Furthermore, CMSPs must comply with a yearly reporting requirement outlining such efforts in addition to adopting policies and processes to support straight-through processing.

What should firms expect?

The T+1 settlement cycle brings with it a snowball effect of additional changes to match the reduced timeframe, such as a more compressed timeframe for prospectus delivery obligations or the timeframe by which a broker needs to have obtained cash payments.

The SEC, further, indicated it would continue to consider the feasibility of a move to T+0 settlement, meaning settlement by the end of trade day, making it almost a supermarket transaction experience.

CUBE comment

The above changes are significant in terms of securities settlements. However, further changes are expected in the US due to the new timeframe.

Currently, the US appears to be on track for a T+1 settlement cycle, however, there are concerns about how this new timeframe will work within Europe and APAC. It is not yet clear if other regions are planning on adopting the T+1 cycle but what is clear is that automation of manual processes is needed to keep up with these new settlement cycles.

This is where CUBE’s agile solution can be trusted as it provides an always up-to-date regulatory profile, relevant to your form. CUBE’s sophisticated AI automatically maps relevant regulatory requirements to internal procedures and policies that can support the implantation of regulatory changes such as the shift from T+2 to T+1.

Discover how CUBE can assist your firm in staying compliant with the upcoming T+1 regulation.