SEC Issues Proposal to Reduce Risks in Clearance and Settlement

  • Source: sec.gov

Treliant Takeaway:

Treliant can help banks and financial market infrastructure utilities design and implement the post trade operating model by analyzing the major pain points in the operational processes, technology applications, and people skills set and eventually deliver a cost efficient post trade operating model by seamlessly deploying our network of global experts and service delivery centers (SDC’s) in delivering an accelerated outcome. Our extensive, practical experience and intellectual capital allow us to bring the world’s leading industry practices to optimize the global markets post trade business.

Highlights:

Objective of this consultation:

The Securities and Exchange Commission proposed to reduce risks in the clearance and settlement of securities. Specifically, the proposed changes would:

  1. Shorten the standard settlement cycle for securities transactions from two business days after trade date (T+2) to one business day after trade date (T+1);
  2. Eliminate the separate T+4 settlement cycle for firm commitment offerings priced after 4:30 p.m.;
  3. Improve the processing of institutional trades by proposing new requirements for broker-dealers and registered investment advisers intended to improve the rate of same-day affirmations; and
  4. Facilitate straight-through processing by proposing new requirements applicable to clearing agencies that are central matching service providers (CMSPs).

What Next?

The public comment period—using a new format following complaints that the comment period was too short—will be open for 60 days following publication of the proposing release on the SEC’s website or 30 days following publication in the Federal Register, whichever period is longer. If the proposal were adopted, the new T+1 settlement cycle would be implemented by March 31, 2024.

Why set a path to T+0?

According to Gary Gensler, back in the 1920s, there was a one-day settlement cycle, but it was later “extended because messengers were getting too tired to make all their runs on Wall Street in the given time! Over the decades, the length of the settlement cycle has ebbed and flowed….from T+5 to T+3 in 1993 and from T+3 to T+2 in 2017. These changes were made possible by new technologies that made the settling process more efficient.”

This proposal is intended to address the unintended effects of market volatility emanating from the pandemic and also from the meme stock trading frenzy last year which prompted the CCP’s that guarantees trades to demand that retail brokerages pay billions of dollars in extra collateral to guarantee trades in case either party defaults. In response, several brokers restricted trading in the affected stocks and the problem in part was attributed to T+2 timeframe to settle the trades. By moving towards T+1 settlement cycle (and ultimately to T+0) it would help reduce the credit, market, and liquidity risks in securities transactions faced by market participants and U.S. investors. Additionally, moving towards T+1 settlement cycle would help improve the processing of institutional trades by accelerating the confirmation and affirmation of such trades between broker-dealers and their institutional customer.

 Where does the industry stand in relation to T+0 settlement ambitions?

DTCC’s “Project Ion” initiative, an alternative settlement platform that leverages distributed ledger technology (DLT), has already moved to the development phase following a successful prototype pilot with leading market participant firms. DTCC’s Project Ion platform is modeled around a netted T+0 settlement cycle — but capable of supporting T+2, T+1, T+0 or extended settlement cycles. DTCC has the quantitative data and qualitative feedback to build out a production-ready workflow and a roadmap for, subject to regulatory approval, future full industry integration and adoption.

Press release: https://www.sec.gov/news/press-release/2022-21

Fact sheet:  https://www.sec.gov/files/34-94196-fact-sheet.pdf

Proposed rule: https://www.sec.gov/rules/proposed/2022/34-94196.pdf

 

Author

Kishore Ramakrishnan

Kishore Ramakrishnan is Managing Director, Regulatory Change Management for Treliant’s Capital Markets practice. He has over 20 years of global industry and consulting experience across the banking, capital markets, asset, and wealth management businesses. Kishore is a trusted advisor and respected thought leader in the risk, regulation, and compliance domains…