With proposed regulatory changes to capital, liquidity, and risk management for U.S. banks and increased focus on data and modeling, financial firms can expect unprecedented regulatory intensity in 2024.

While banks are still in the process of implementing the Basel Committee on Banking Supervision’s capital reforms, new and urgent concerns continue to arise elsewhere on the regulatory horizon.  Regulators are striving to improve resilience in the marketplace as a whole by centralizing more transactions to increase the proportion of cleared deals and by tightening settlement times. Meanwhile newer areas of regulation such as artificial intelligence/machine learning (AI/ML) and environmental, social, and governance (ESG) are also generating significant requirements.  Although 2023 has been a largely profitable year for U.S. banks, the pressure to identify structural weaknesses and fix them via digital transformation and automation has never been higher.

Accelerated Settlement: The Global Move to t+1

Settlement acceleration toward t+1 has become a key priority in the global securities industry in recent years—the overarching theory being that greater speed can achieve a reduction in counterparty and market risks, improvement in market liquidity, and greater operational efficiency.

Regulatory bodies and industry organizations across the globe are recognizing the advantages of accelerated settlement and are actively promoting its adoption. As certain jurisdictions, such as the U.S., have tended to lead, other jurisdictions have been compelled to consider their own t+1 rules in order to interoperate well with faster U.S. settlement.

  • In the United States, the Securities and Exchange Commission (SEC) has proposed that the settlement cycle for most securities should be shortened from t+2 to t+1 as of May 28, 2024.
  • India’s stock markets completed their transition to t+1 in January 2023; Indian regulators have indicated that achieving t+0 is the next goal.
  • The Canadian Capital Markets Association has also announced that Canada will move to t+1 on May 27, 2024, in a move intended to align with U.S. practice and reduce settlement risk.
  • Across the Atlantic, European regulators are considering their own move to t+1, as the European Securities and Markets Authority (ESMA) has launched a call for evidence on the shortening of the settlement cycle. This step has been driven by both the cost and risk benefits of t+1, and the need to mitigate the impact on EU markets of the U.S.’s likely move to t+1.  This regulatory push toward faster settlement is likely to encourage market participants to adopt accelerated settlement practices.

The push toward t+1 would have been difficult to realize a decade or even five years ago, but today, advancements in technology and infrastructure are making accelerated settlement more feasible and cost effective. The development of real-time gross settlement systems and distributed ledger technology (DLT) has the potential to revolutionize settlement processes, enabling near-instantaneous settlements and paving the course for transitioning from t+1 to t+0 in the future.

As a result, we can expect accelerated settlement to t+1 to continue to be a global trend, driven by regulatory initiatives, technological advancements, and the need for more efficient financial markets.  But banks will bear a double burden, in terms of their own processes and their interaction with the market.  Operationally, banks will need to accelerate the front- to back-office trade lifecycle, reducing the latency of functions such as allocation and affirmation.  In the marketplace, banks will also need to deal with new time zone and foreign exchange considerations, and the challenges of market misalignment between regions and parties with different settlement processes.

SEC Proposes Expanding Central Clearing of Treasury Securities

In 2023, the SEC issued a proposal that would require clearing agency participants to centrally clear U.S. Treasury transactions, together with a set of changes to the Covered Clearing Agency Standards and broker-dealer protection rules.

The U.S. Treasury market is an indispensable provider of global liquidity.  Traded and held by a variety of investors, corporations, and institutions, U.S. Treasury-issued securities are also used to finance the federal government.  As a result of their critical and unique role in capital markets, and in response to several market events that impacted liquidity, the SEC issued a proposal in September 2022 to expand central clearing to enhance the resilience of the U.S. Treasury market. Given that only 13% of the Treasury cash market is currently fully cleared, the SEC noted that this market is susceptible to counterparty credit risk and systemic risks in the event of a default.

The Government Securities Division (GSD) of the Fixed Income Clearing Corporation (FICC, part of the Depository Trust and Clearing Corp., or DTCC) has been clearing government securities debt for decades, including Treasury bonds.  GSD also clears repo transactions secured with Treasuries (via various sponsored repo models including general collateral finance), which are also included in the SEC’s proposal.  As the only clearing house for U.S. Treasuries, increased clearing would greatly expand DTCC’s role as a systemically important financial market.  At the same time, mandated repo clearing would necessitate participation from many buy-side organizations who are not DTCC members.  Therefore, DTCC’s sponsored models would be the only conduits for participation.  Similar to derivative clearing models, non-members would work with member organizations (usually large broker-dealers) to novate trades for subsequent clearing through FICC (with the clearing member assuming credit risk for their sponsor).

Adoption will be a significant industry endeavor since the U.S. Treasury secondary market is far larger than the derivates market, where clearing was implemented in phases over several years.  Final regulations and implementation timelines are yet to be issued.  Still, while there are undoubtedly risk-reducing elements to expanding central clearing for U.S. Treasuries (and Treasury-backed repo transactions), realization will be difficult.  In exchange for increased resilience and liquidity, participants will need to bear significant costs; for example, thousands of legal agreements will need to be repapered, likely in a short timeframe.  Further, dealers (i.e., clearing members) will need to post margin, in the form of collateral, to the clearing house to backstop trades.  While the SEC rules do not yet mandate reciprocating end-user minimum margin requirements, all participants will be impacted by increased funding requirements (irrespective of allocation), combined with operations, system, and legal changes.  Finally, participants will need to make considerable operational changes, for example to their margin and collateral processes.

Update on U.S. Basel III Endgame

In July 2023, the U.S. regulatory agencies—the Federal Reserve, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation—released the long-awaited notice of proposed rulemaking for the U.S. Basel III capital reforms, a set of provisions known as Basel III Endgame (B3E). The U.S. is the last major jurisdiction to publish its response to the stricter global bank capital requirements of Basel III.

The proposed B3E rule aligns with the Basel III agreement, aiming to bolster the system after recent turmoil by applying broader capital requirements to sizable banks (>$100 billion in assets). The proposal includes a 120-day period for comment from the industry—but if the rule is passed largely as is, big banks would be required to adopt the new framework beginning July 2025, with full compliance by July 2028.

Proposed changes include:

  • Standardized capital calculations, with credit value adjustment calculation mandatory for all uncleared derivatives counterparties
  • Factoring unrealized gains and losses into capital ratios
  • Provision for a three-year transition period

It has been estimated that these changes will result in a 16% increase to common equity tier 1 capital levels and a 20% increase to risk-weighted assets (RWA) for large bank holding companies (with U.S. global systemically important banks and international holding companies seeing the highest increases). The changes in capital requirements are likely to impact individual banks differently—and are likely to disadvantage global banks domiciled in the U.S. the most. The largest U.S. banks will also have to manage the operational burden of maintaining parallel calculations for reporting systems across jurisdictions given the U.S. deviation from the international Basel framework.

In the next few months, we expect banks to revisit their trading and banking book portfolios and make significant adjustments to their business models in order to deal with the punitive capital, RWA, and operational challenges associated with the new rulemaking. With the U.S. intending to go-live 6 months later than international jurisdictions, we might see pressure from the industry to defer the overseas go-live dates by six months to avoid regulatory arbitrage and achieve harmonization of the global implementation deadlines.

For more information on the key changes associated with the U.S. Basel III capital reforms, please refer to our article titled “U.S. Basel III Capital Reforms—Headline Takeaways.

New Risks and New Regulations

While t+1 settlement, Treasury clearing, and Basel III will loom large for many banks, these changes take place as multiple newer areas of regulation vie for the attention of compliance officers.

AI and ML Create New Challenges in Model Risk, and Regulators Respond

The UK’s Prudential Regulatory Authority has led the regulatory community by introducing new AI/ML-aware model risk management regulations in 2023, and other jurisdictions including the U.S. are not far behind.  The unique risk profiles of new AI/ML models and their demanding data requirements are driving both new regulation and new operational techniques; see our whitepaper.

ESG and Climate Regulation Advance, but Slowly

Both EU and U.S. regulators appeared to reduce the pace of ESG regulation this year. The EU adopted a version of the European Sustainability Reporting Standards that is less rigorous than the original proposals, while reclassifying some reporting from mandatory to voluntary.  In the U.S., ESG issues were conspicuously absent from the SEC’s list of examination priorities for 2024. Nevertheless, regulation did gradually tighten, for instance with California’s new Climate Corporate Data Accountability Act.

Cybersecurity and Resilience Receive Focus

Focus on cybersecurity increased sharply in November with the widely publicized ransomware attack on Industrial and Commercial Bank of China.  The implications are not just for security but for overall market resilience, since the attack on a single firm turned out to have large-scale impact on the U.S. Treasury market.  Both regulators and market participants will be scrutinizing the security of the major firms closely—especially since, in China, the payment of a ransom was reportedly the only path to resuming operations.


Megan Beukelman

Megan Beukelman, a Director in Treliant’s Capital Markets Solutions practice, is a management consulting professional with global experience leading transformation, regulatory reform, cost-out and operating model redesign programs. At Treliant, Megan has partnered with a Global Tier 1 Investment Bank to transform their Global Markets business, leading multiple regulatory reform…

Tom Ciulla

Tom Ciulla is a Managing Director in Treliant’s Capital Markets Solutions practice. Tom is a senior executive with extensive business, operations, and IT experience as a Big 4 partner serving sell-side, buy-side, and industry utility clients across global financial markets. He specializes in developing financial services solutions, while growing and…

Cheyanne Lui

Cheyanne Lui is a Senior Manager in Treliant’s Capital Markets Regulatory Change Management practice with an international background. She has over 16 years of experience and specializes in leading regulatory reform, remediation and transformation projects across the financial sector. Prior to joining Treliant, Cheyanne was a Manager in a top…

Kishore Ramakrishnan

Kishore Ramakrishnan is Managing Director, Capital Markets Advisory at Treliant. He has over 24 years of global industry and consulting experience across the banking, capital markets, asset, and wealth management businesses.