Following years of preparation, the securities industry is embarking upon on a major transition to T+2 settlement and key industry groups are bracing themselves for unseen pitfalls.
After ye
ars of preparation, the U.S. securities industry is taking its first steps toward shorter settlement, which for many banks and other financial services firms has meant an end-to-end overhaul for key operations.
Over the Labor Day weekend, major industry associations and industry participants will be skipping their last summer holiday to oversee the shortening of the securities settlement cycle from three business days, known as T+3, to a settlement cycle of two business days, or T+2.
The DTCC, the Securities Industry and Financial Markets Association (SIFMA), the Investment Company Institute (ICI) and volunteers from major industry sectors have been driving the process.
In fact, the DTCC created the Industry Steering Committee (ISC) and an Industry Working Group (IWG) to involve major industry representatives. The IWG consists of approximately 70 buy- and sell-side firms, and has been supported by many sub-working groups.
After the DTCC launched the ISC and IWG, the ICI and SIFMA teamed up to lead these efforts. Marty Burns, chief industry operations officer for the ICI, and Thomas Price, managing director for the technology, operations, and business continuity group of SIFMA, were chosen as co-chairs of the steering committee.
A Big Bang Approach
“Friday, September 1, will be the last day for trading with the old three-day settlement cycle,” Price says in a blog posting on the SIFMA website, dated August 24. “So, trades executed on September 1 will also clear on September 7.”
Things change for good on September 5 because that will be “the first day securities, primarily equities, corporates and munis, will be traded on a two-day settlement cycle,” Price says. “That means trades executed on September 5 will settle on September 7. Settlement marks the completion of a trade and official transfer of ownership.”
Canada, Mexico and Peru will also move to a T+2 settlement cycle on September 5, Price notes.
“After establishing an industry consensus for T+2, we worked with over 600 market participants to develop a playbook that individual companies used as a guide to achieve T+2 on the target timeframe,” Price says. “Shortening the settlement cycle impacts many different processes, markets, infrastructure and products.”
Thomas Price, managing director, SIFMA
It’s the wide reach of T+2 that causes many worries among those in operations who have to carry out this industry mandate. But firms are moving ahead with internal changes, and are likely to take a “big bang” approach, John Abel, DTCC executive director, settlement and asset servicing, tells FTF News.
“I don’t think most firms have the luxury of doing the migration by product type,” Abel says. “I think for most firms, it’s kind of a big bang and they will be migrating their code pretty much all at the same time. Beginning Friday night and probably going into Monday night, it will depend on the systems that they’re adjusting. In fact, this is very similar to the way we [DTCC officials] are doing it.”
Many industry participants are expecting a fairly straightforward transition.
“Generally, I think it will go smoothly,” says one industry source. “I do believe that firms will need to examine their cash controls and tighten margin procedures and payments to ensure that they meet their settlement needs and not incur additional fees. Also, trade-break procedures will need to tighten, given that we drop a day to resolve issues so, daily review of activity will become even more important. It has been and will continue to be all about communication among all parties.”
One of the upsides is that the long preparation for the T+2 move has taken many pitfalls into consideration, the source says. “Much of the world (especially Europe) has transitioned to T+2. For many firms, this transition was something they have already been dealing with, so the expertise and pitfalls (to some extent) have been addressed,” the source adds.
Changes for the DTCC’s Subsidiaries
The T+2 change will mean systemic and processing changes for the DTCC and its key subsidiaries:
- the Depository Trust Company (DTC), which provides settlement services, corporate actions processing, securities processing, issuer services, underwriting services and global tax services;
- the National Securities Clearing Corp. (NSCC), which offer clearing, settlement, risk management, central counterparty services and “a guarantee of completion for certain transactions for virtually all broker-to-broker trades involving equities, corporate and municipal debt, American depositary receipts, exchange-traded funds, and unit investment trusts;”
- and Omgeo, which automates the post-trade life cycle via a matching/trade confirmation service, allocation support, electronic trade agreements for fixed income, and a database for standing settlement instructions (SSI), among other offerings.
“We have changes in our NSCC subsidiary, around assigning the settlement date to trades,” the DTCC’s Abel notes. “We have changes in our Omgeo subsidiary. Many of those focus on changes around the cutoffs for affirming a trade. We have changes in the DTC subsidiary and a lot of those have to do with some of the corporate actions processing.”
While the impacts on these three subsidiaries, “might not be huge,” these smaller changes “need to be made and coordinated across the three subsidiaries. And again, across the whole industry,” Abel says.
The coordination will start after markets close on Friday, according to a DTCC conversion white paper.
“The DTCC’s production environment will conform to a T+3 settlement cycle until close of business on Friday. September 1, 2017 and will be fully converted into a T+2 settlement cycle environment prior to start of business on Tuesday, September 5, 2017,” according to the white paper.
The DTCC says the conversion process will be transparent to
John Abel, DTCC executive director, settlement and asset servicing
DTCC members as its T+2 coding changes will be introduced into the production environment after DTC, NSCC and Omgeo processes are complete and outputs have been distributed, according to the document.
At the same time, the T+2 ISC has been “preparing communication plans for the T+2 conversion period and DTCC’s regularly scheduled updates will be incorporated into those plans,” according to DTCC officials.
The DTCC white paper on conversion is available here.
No Regulators in the Command Center
Regulators, even though they declined to take the lead, still had a role to play. SIFMA officials say that 49 rules had to be modified or reviewed to facilitate the T+2 move.
In fact, the industry crossed a major milestone this past March when the SEC amended a key rule to shorten the settlement cycle. In addition, the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization (SRO), conducted industry tests on Saturday, Aug. 9, 2017, according to officials quoted in a recent FTF News story.
“Regarding the test: FINRA sponsored a user acceptance test [UAT] for firms to test T+2 changes on Aug. 5, and FINRA firms did participate in the Aug. 19 DTCC user acceptance test,” a spokesperson tells FTF News. “Both tests were successful. In addition, FINRA has made our test facility available to firms during weekdays from April 10 through Sept. 1,” the spokesperson adds.
“FINRA has of course amended its rules to reflect the change in the settlement period. These changes were described in these two regulatory notices: Regulatory Notice 17-12 and Regulatory Notice 17-19,” the spokesperson adds.
While the transition gets underway this weekend, regulatory officials and the media are not allowed to participate in or witness the change-over.
Yet in anticipation of possible challenges, SIFMA officials note that a T+2 Command Center has been set up and “the first industry call will be Friday, Sept. 1 from 4:30-5:30 pm,” according to the association’s website.
“To ensure a smooth conversion to T+2 settlement on September 5, 2017, the T+2 Command Center will provide conversion status information, provide transparency into the activity of other participants, and serve as a forum for issue identification and socialization. The T+2 Command Center’s support will be most active during the conversion period, from Friday, September 1 through Friday, September 8,” according to SIFMA.
The SIFMA website provides details on the industry call schedule, a T+2 project manager contact list, and a market infrastructure activity schedule.
In addition, DTCC officials say that the Command Center’s T+2 implementation support plan will feature a T2 Implementation mailbox, “monitored by a T+2 support team throughout regular business days and hours, and from 7:00 am ET to 7:00 pm ET on Saturday, September 2, 2017 through Monday, September 4, 2017. The support team will route the questions to appropriate industry infrastructure or organization, and will coordinate timely resolution of inquiry.”
There will also be status updates via the Command Center to track “information to the UST2 website beginning Friday, September 1, 2017 through Friday September 8, 2017 at defined intervals and on an as-needed basis,” according to the DTCC.
This industry-oriented effort will require securities firms to be highly resourceful.
“Each individual firm is responsible for executing its own T+2 transition plan. Firms should first communicate directly with their clients and suppliers regarding any issues that arise during the conversion period,” according to SIFMA. “A firm should address any problem that occurs within the firm or with a counterparty, infrastructure, service provider, vendor, or other intermediary directly with that entity. The T+2 Command Center is not responsible for issue identification and resolution between individual firms and their infrastructure and/or service providers.”
In addition, the T+2 Command Center can serve as a forum “to raise and socialize broad industry issues that are beyond the scope of firm-specific challenges, provide updates, and work with appropriate parties to determine any additional steps required,” according to SIFMA.
“Industry participants should raise such issues to T2Conversion@sifma.org or on the industry conference calls scheduled throughout the conversion period,” SIFMA officials say. “All communication with the T+2 Command Center is strictly confidential. We will not share the identity of the firm submitting an issue unless permitted by the submitting party.”
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