Time is money, the adage goes. When it comes to settlement cycles for U.S. securities, time also equates to counterparty default risk. FINRA margin requirements, designed to mitigate these risks, provide vital stability. However, billions held in margin and the need for additional liquidity on peak settlement days or for certain securities places a burden on brokers.
In February 2021, the Depository Trust & Clearing Corporation (DTCC) published a whitepaper arguing that a shorter settlement cycle was the most logical way to reduce the risks that drive margin requirements. An industry steering committee (ISC) and an industry working group (IWG) were formed to help the financial services industry reach consensus on how to accelerate the settlement cycle from trade date plus 2 days (T+2) to trade date plus one day (T+1).
Recommendations and Timeline
In December 2021, the DTCC, the Securities Industry and Financial Markets Association (SIFMA), and the Investment Company Institute (ICI) published a report that sets out how a T+1 settlement cycle can be achieved, including a set of recommendations and a migration timeline.
No date has been set for a move to T+1, but the ISC and IWG have proposed the first or second quarter of 2024. Whatever the timing, this change will have broad-reaching impact for brokers. As an investor communications provider who is actively engaged in the entire lifecycle of regulatory change management, Mediant recommends reading the December report’s recommendations in full, but paying particular attention to the following:
The report recommends that industry participants: “Advocate for and promote the broad scale adoption of e-delivery as the default receipt method for trade documentation…with the option for clients to request paper documentation post-settlement.” It also asks participants to: “Support ‘access equals delivery’ as a default for communication to investors…which would satisfy the “delivery” requirement for securities documentation.
A related recommendation is to “Adopt SWIFT messaging, or other automated means, across the corporate actions lifecycle to increase efficient communications…related to corporate actions events.”
If adopted, the changes would mean that documentation and messaging would normally need to be electronic. Indeed, the ISC and IWG believes that SEC rules should make electronic delivery the default method for trade confirmations and other documentation. The report also notes that corporate action notifications, client account statements, internal controls, and compliance-related activities will need reviewing.
Taking the example of trade confirmations, which currently can be paper or electronic: these are required to be delivered to the client at or before settlement. The report stresses that the default method of delivery would need to be electronic due to the time constraints of printing and mailing. Vendor agreements and statements of work would therefore need to be revised to support T+1 settlement.
Equity and debt offerings
Commentary in the report includes the potential for different settlement time frames needed for equity offerings against secondary market equity transactions. It recommends retaining an exception permitted within Rule 15c6-1(c), but shortening the applicable period to T+2.
Rule 15c6-1(c) dates back to 1995 and the exception is rarely used today, but is likely to be needed in a T+1 settlement cycle environment. The shorter time frame would be challenging for equity offerings due to the need to have a final prospectus available within T+1. However, a secondary transaction could easily be completed within T+1.
With our innovative technology solutions, Mediant will meet all T+1 post-sale deliveries of our client trades under the proposed ruling as it is filed with the SEC under a closer to real-time scenario.
For additional information, please contact us.