In 2022 the Securities and Exchange Commission approved rule changes to reduce the standard settlement cycle for most broker-dealer transactions in securities from two business days after a trade,T+2, by one day to T+1. However, the US regulator needs to publish its final regulatory approval in order to ensure that market participants can start preparing to meet the 2024 deadline. 

Gary Gensler, chair of the SEC, said the change could lower risk to the financial system and drive greater efficiencies in the markets. Affirmations, confirmations, and allocations will need to take place as soon as technologically practicable on trade date, and clearing agencies that provide central matching services require policies and procedures to facilitate fully automated transactions processing. As a result, counterparties should need to post less margin with clearinghouses which will reduce credit, market, and liquidity risks.

To help market participants make the transition, SIFMA, the Investment Company Institute, the DTCC, and Deloitte have published The T+1 Securities Settlement Industry Implementation Playbook. The guide assumes the change will take place in the third quarter of 2024, after the Labor Day weekend in September, subject to final regulatory approval from the SEC. 

 Jeffrey O’Connor, head of market structure, Americas, at Liquidnet said T+1 seems practical and has industry-wide approval. 

“The biggest question is how long it will take to implement and the SEC needs to provide more information so the industry can commit resources and investment,” he added. “I think we are going to get the final proposal in the first quarter of this year.”

O’Connor highlighted that the US had successfully compressed the settlement cycle from T+3 to T+2 in 2017, and the process was relatively smooth.

“We have done it before from a systems and operational perspective,” he said. “However, it is not an easy task and needs significant time.”

He described the change to T+1 as “monumental” as its impact will cover products, markets, processes, customer service providers and central counterparty clearing houses. In addition, new regulation always has unintended consequences and he called attention to possible impact on the swaps market, currently used by prime brokers to manage risks. 

SIFMA said: “Unlike the move to T+2, the move to T+1 is a wholesale change to the processes which take place between execution and settlement.”

Impacted areas, according to SIFMA, include global settlements, documentation, corporate actions, securities issuance, and coordination for mutual fund portfolio securities and investor shares. Other areas that will require significant change include delivery of investor documentation, foreign exchange, global movement of securities and currency, batch cycle timing, and exchange-traded fund (ETF) creation and redemption. 

In January this year DTCC issued a document, T+1 Test Approach: Detailed Testing Framework, to help market participants prepare for testing T+1 with industry infrastructures including the central clearer, exchanges and the Options Clearing Corporation.

Robert Cavallo, DTCC director, clearance and settlement, product management, said in a statement: “We are halfway through a marathon and still have a long way to go, but now that 2024 is in sight – whether that ultimate date is determined to be March or September – we must move from planning and development to testing.”

If the move to T+1 is successful, it is possible that same day settlement, or T+0, could follow. When the SEC approved condensing settlement to T+1, Gensler said the agency could also review the challenges associated with, and potential paths, to achieving a same-day settlement cycle.

O’Connor said: “The SEC’s goal is to address systemic risk and personally, I think we should just rip the band aid off and go to T+0.”