Starting from May 28, the US Securities and Exchange Commission (SEC) will require most broker-dealer transactions to be settled within one business day after the trade date, also known as the T+1 arrangement.
The shortened securities settlement cycle, moving from T+2, will prohibit broker-dealers functioning in the US market from effecting or entering into a contract for the purchase or sale of a security that provides for payment of funds and delivery of securities later than the first business day after the date of contract, according to the SEC’s new rules.
The regulatory body also pointed out that the rules might require broker-dealers to integrate certain technology into their business operations, or to make changes in workflows to comply with the T+1 environment.
Time difference
For broker-dealers in Asia Pacific, who can sit in time zones some 12 hours (depending on the country) ahead of the US, the new settlement requirements could prove trickier to deal with. The ‘compressed timeframe’, as some put it, will create difficulties for completing necessary trading tasks.
“Asian firms will have just a few hours to complete the required operational tasks prior to settlement,” echoed Val Wotton, managing director and general manager of institutional trade processing at DTCC, which settles most securities transactions in the US market. “In the absence of real-time operational processing, there will be little room for errors or time to fix any potential issues or exceptions.”
Wotton explained that as per the requirement of SEC's new Exchange Act Rule 15c6-2, brokers and counterparties need to complete allocation, confirmation and affirmation processes no later than by the end of the date of trade.
The industry recommendation is for allocation to be completed by 7:00 PM ET on the trade date, in order to allow sufficient time for affirmation to be completed by 9:00 PM ET, he continued. Otherwise, firms may have to issue a night delivery order (NDO) by 11:30PM ET on trade day, or a day delivery order (DDO) on T+1, which are more costly and operationally intensive.
Affirmation automation is key, Wotton concluded. He urged Asian investors to raise awareness of the affirmation process, which takes place before settlement instruction is sent to the US depository and is something unique to the US market.
Chee-Seng Lok, managing director of product management for Asia Pacific at State Street, explained to FinanceAsia that under the previous T+2 environment, it was usually global custodians that handle the affirmation process for clients in Asia, matching trade instructions to brokers’ confirmations.
However, asset managers and owners are recommended to affirm the trades themselves after the US switches to T+1, he said. Investors should consider applying for their own DTCC institutional identification and adopt automation solutions.
State Steet has an established enterprise project management office to run cross-organisational T+1 settlement programmes dedicated to the US and Canada. Lok said that the process has been challenging from a client engagement perspective, requiring sufficient education in regulatory requirements, process flows and technology.
Neil Synott, Apac chief commercial officer at IQ-EQ, said that custodians will need to significantly adjust their back-office operations to accommodate the new settlement cycle. Implementing automation, extending operational hours and potentially increasing headcount are some suggestions.
“Ensuring robust technology infrastructure capable of handling the faster settlement cycle is crucial,” he said.
Moreover, shortened settlement cycles means higher liquidity requirements and foreign exchange (FX) processing on the day or in the early morning of T+1. Lok suggested that investors should adopt automated FX instruction and workflow solutions, while Synott believes cash management strategies should also be adjusted to accommodate higher liquidity and short-term funding needs.
Asia settlements
The Securities and Exchange Board of India (SEBI) has introduced an optional version of T+0 settlement cycle since March 28, meaning that all trades confirmed by 1:30PM will be allowed to be settled on the day.
This came after the Indian market’s full shift to the T+1 settlement scheme in January. SEBI said in a statement that technology, architecture and capacity of market participants have presented the opportunity to further advance clearing and settlement timelines.
Mainland China’s onshore securities market operates based on a T+0 settlement cycle, which requires trades to be executed and settled on the same day of transaction, providing a processing window of approximately four hours after market close.
Other major markets, including the Hong Kong Stock Exchange (HKEX) and Singapore Stock Exchange (SGX), mostly follow a settlement cycle of T+2. HKEX’s stock connect programme with mainland China sticks to T+0.
DTCC’s Wotton commented that these settlement cycle transitions underscore the importance of a thorough impact assessment, collaborative efforts among stakeholders, investment in technology and infrastructure, regulatory alignment, risk management, and education and training for market participants.
“Transitioning to shorter settlement cycles across the Apac region is not a one-size-fits-all endeavour, as countries vary in their levels of automation and market maturity,” he noted. Asian markets are at different levels in terms of technological and operational sophistication, and thorough assessment on funding, existing processes and underlying technology is crucial.
Synott at IQ-EQ said that the US’ shift to T+1 could put pressure on Asian markets to consider similar changes in the future, but significant collaboration and infrastructure upgrades would be required in the region first.
