U.S. market participants have been preparing for the next round of settlement cycle compression since it was officially proposed by the Securities and Exchange Commission (SEC) in February 2022.1 The standard settlement cycle will shorten from two business days (T+2) to one business day (T+1) after trade date. The move comes six years after T+2 first became the U.S. market standard in 2017.
Financial institutions should start taking the necessary steps to ensure compliance with these new rules ahead of deadlines, and conduct the due diligence especially needed for record keeping requirements. By understanding the new changes to the final rules and steps for preparation, financial institutions can effectively prepare for any unexpected delays in project plans and timelines.
What Is Changing?
The SEC approved the following final rules for broker dealers, custodians, investment advisors, and clearing agencies on February 15, 20232 to shorten the settlement cycle:
- The final go-live date is May 28, 2024 (note that this is 2 months after the initial proposed date of March 31, 2024, and 4 months before the industry proposed date of September 3, 2024).
- Among others, the move to T+1 applies to U.S. cash equities, corporate bonds, securities lending, exchange-traded funds, and unit investment trusts.1
- Record keeping requirement amendments for registered investment advisors have changed. Books and records must be kept for each confirmation, allocation, and affirmation sent or received with a timestamp.
- The rules also add a new requirement to facilitate straight-through processing, which applies to certain types of clearing agencies that provide central matching services.
The SEC believes that the final rule will benefit investors, reduce the risks market participants face when dealing with securities transactions, and improve institutional trade processing.2
To prepare for the shortened settlement cycle, each impacted entity should consider the following five next steps:
- Reassess timelines/project plans based on the new go-live date and the SEC confirmed scope. Commence your impact assessment and project initiation ASAP if you haven’t started yet.
- Draft third-party/client communication plans for T+1 implementation and begin outreach to clients regarding behavioral changes.
- Consider automation techniques via internal systems or third-party vendors. Review the detailed industry testing guidance with testing windows starting in Q3 2023.
- Conduct a review of the current record-keeping requirements. Books and records should be reasonably designed to ensure allocations, confirmations, and affirmations are completed no later than the end of trade date.
- Investment advisors should ensure records of each confirmation, allocation, and affirmation received are maintained with a date and time stamp.1
The final rule will become effective 60 days from the Federal Register publication date. Compliance with the rule is not required until May 28, 2024.
How FORVIS Can Help
For questions on the implications of T+1, or for help figuring out your organization’s next steps, please reach out to a professional at FORVIS or submit the Contact Us form below.