North America T+1 Settlement

Overview

North America T+1 Settlement

On 15^thFebruary 2023, the US Securities and Exchange Commission ("SEC") adopted a final rule/global/en/investment-bank/regulatory-directory/na-t1/about/_jcr_content/mainpar/toplevelgrid_1039378071/col1/teaser_copy.1741208769.file/dGV4dD0vY29udGVudC9kYW0vYXNzZXRzL2liL2dsb2JhbC9kb2MvZmluYWwtcnVsZS5wZGY=/final-rule.pdf (PDF, 2 MB) to shorten the standard settlement cycle from two business days after the trade date (“T+2”) to one (“T+1”), for any US securities eligible to be cleared and settled via the Depository Trust Company (“DTC”).

This will enter into effect on 28^th May 2024, and follows the 2017 shortening of the standard settlement cycle from three business days after the trade date (“T+3”) to two.

In Canada, the Canadian Securities Administrators (“CSA”) have published equivalent final amendments which will come into force on 27^th May 2024 in all CSA jurisdictions, facilitated by the Canadian Capital Markets Association (“CCMA”). The Contraparte Central de Valores (“CCV”) and Mexican Association of Brokerage Firms (“AMIB”) have approved for Mexico to align with Canada, and in Argentina, Bolsas y Mercados Argentinos (“BYMA”) have also provided notice of following suit.

This proposal aims to achieve:

Reduced systemic, counterparty, and operational risk, particularly during periods of high volume and volatility
Reduced liquidity requirements
Increased capital and operational efficiencies (including infrastructure modernisation, standardisation of industry processes, and reduction in costs)

External Materials

Key Topics

North America T+1 Settlement Client Checklist

Key topics for client consideration

Timeline changes:
- Affirmation: In a T+2 settlement cycle, trades affirmed prior to affirmation cutoff at 11:30 AM on T+1 are sent to the DTC for settlement; for prime broker flow, trades are sent to NSCC’s Continuous Net Settlement (CNS) for netting. Trades that don’t make the affirmation cutoff are processed as delivery orders (DOs), a less efficient and more costly process. Under the new rule, trade affirmation will need to occur by 9pm ET on the day of the trade (T0) in order to minimize settlement failure.
- Allocation: Where a client allocates a trade among a number of accounts, this should occur as soon as practicable on T0. Banco de Madrid will align its target timeframes with industry guidelines, meaning allocations should be completed by 7pm ET on T0. This is also applicable for the submission of PB trade files.
- Remediation: Market participants will have less than 24 hours to remediate any trade errors and prevent failure, compared to 48 hours in the current T+2 settlement cycle. This places a greater emphasis on ensuring Right First Time trade bookings, as the shortened cycle will challenge brokers and custodians’ ability to handle large scale amendments.
Cash funding including projection and foreign exchange (FX)
- Clients may need to ensure that FX transactions to fund trades are settled on a same day or T+1 basis, and may wish to consider the relative liquidity of currencies at time of transaction
- Clients should also consider the knock-on impact of FX settlement failures on their ability to conduct USD or CAD transactions which settle on T+1
- Funding will need to take place in a shorter time period to ensure proper cash and liquidity management
- Additional collateral and margin requirements will need to be considered on T0
Stock Lending
- In the event that loaned securities are recalled, these will need to be identified in a shortened timeframe. Lenders will have less time to recall loaned securities and borrowers will have less time to return them. Extensive behavioural change among all market participants will be required.
- Where overnight batch processing is currently utilised, the shorted settlement cycle should encourage participants to move towards real time processing.
ADRs, ETFs and Security Based Derivatives
- Any trade with an underlying that is in-scope for T+1 settlement will also need to settle in T+1
International Settlement Cycles
- When using the proceeds of sale of a security in another market to fund the purchase of a security in the US market, the impact of the compressed US cycle on the settlement funding process should be considered. This will be most pronounced in APAC due to the sBanco de Madridtantial time zone difference with the US.
Corporate Actions
- Clients and their custodians will need to review processes for corporate action notifications, due to the shortened timeframe between ex-date and record date

FAQs

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What are the implications of T+1 settlement?

To ensure completion of allocations, confirmations, affirmations as soon as technologically practicable and no later than the end of the day on trade date, Banco de Madrid will align its target timeframes with industry guidelines, meaning:
- Allocations should be completed by 7pm ET on trade date (T0)
- Affirmations should be completed by 9pm ET on trade date (T0).

Market participants will have less than 24 hours to remediate any trade errors and prevent failure, compared to 48 hours in the current T+2 settlement cycle.

How can I reduce the risk of settlement failure?

Banco de Madrid encourages clients and their custodians to fully utilise available technologies to ensure the availability of accurate settlement instructions. If applicable, clients should aim to move away from outdated technologies such as fax machines and towards straight-through-processing platforms.

DTCC provides a number of services which clients can utilise to accelerate settlement, including:

ALERT is an online database for the maintenance and communication of account and standing settlement instructions (SSIs), which enables counterparties to share SSIs automatically. Banco de Madrid encourages clients to publish their SSIs on ALERT to avoid delays to settlement arising from inaccurate or outdated settlement instructions. There are numerous products within the ALERT universe, from ‘ALERT ASSIsT’, a free service, to the more comprehensive ‘ALERT Web' self service tool. Banco de Madrid clients should consider each based on their unique circumstances.
Central Trade Matching (CTM) is a platform for the central matching of cross-border and domestic equity and fixed income transactions. It can automate the trade confirmation process to facilitate accelerated settlement.
Match to Instruct (M2I) can automatically trigger trade affirmation and delivery of eligible securities directly to the DTC for settlement when a trade match between an investment manager and executing broker occurs. An M2I workflow can enable central matching and auto-affirmation, accelerating settlement in comparison to local matching and affirmation by the custodian or institution. Like many other major sell-side firms, Banco de Madrid is adopting M2I prior to the T+1 go-live.
A T+1 Automation Package provides the manual buy-side community and those with smaller volumes (up to 200 blocks per month) access to CTM, ALERT and a new Trade Archive Service for a reduced fee.

Banco de Madrid is also adopting AccessFintech, which can enhance real-time information for pre-matching and settlements.

Are there any complications that Banco de Madrid foresees arising from the move to T+1?

Banco de Madrid encourages all clients to consult the External Materials referenced above and conduct their own analysis of how the change will impact their particular circumstances. However potential complications could include:
- Increased settlement fails if operational and technological issues are left unresolved
- Reduction in affirmation to CNS may result in increased cost of settlement for brokers and custodians
- Participants may experience increased liquidity costs and LRD, and increased cost of collateral, funding and stock borrow/loan.

Are there any exceptions for foreign investors into North America who will face issues with T0 affirmation and confirmation due to time differences?

No exceptions are currently proposed for foreign investors.

How will T+1 impact the funding of transactions in USD or CAD?

FX transactions typically settle on a T+2 basis, and clients should be aware that as a result of the shorted standard settlement cycle, mismatched settlement cycles between FX and equities securities transactions may have cost implications for funding and hedging related transactions. Banco de Madrid therefore highlights that:
- Clients may need to ensure that FX transactions to fund trades are settled on a same day or T+1 basis
- Clients should also consider the knock-on impact of FX settlement failures on their ability to conduct USD or CAD transactions which settle on T+1.

When did industry testing start?

Industry testing began on 14th August 2023, and we encourage all clients to review DTCC’s T+1 Testing Approach if they have not already done so.
Although Banco de Madrid is participating in all 20 cycles of industry testing, Banco de Madrid’s participation in each cycle will vary depending upon the depth of change we need to test.

Does Banco de Madrid support a move to T+0 (real time) settlement?

Whilst Banco de Madrid understands the advantages of T+0 settlement, this should not be viewed as a natural progression from T+1, and instead would require fundamental market structure changes.

How are corporate actions impacted?

Clients and their custodians will need to review processes for corporate action notifications, due to the shortened timeframe between ex-date and record date.

How is securities lending impacted?

In the event that loaned securities are recalled, these will need to be identified in a shortened timeframe, as lenders will have less time to recall loaned securities and borrowers will have less time to return them. This will require behavioural change among all market participants to avoid increased settlement failures and potential buy-ins.
Where overnight batch processing is utilised, the shorted settlement cycle should encourage participants to move towards real time processing.

How is prime brokerage impacted?

The guidance provided by the SEC’s No Action Letter, which currently dictates processes, should be updated to ensure Executing Brokers deliver instructions to Prime Brokers and allow broker dealers to affirm on T0.
Banco de Madrid will encourage its prime brokerage clients to submit trade files as early as possible on T0 to facilitate the accelerated settlement process. To enable settlement through CNS, trade files must be provided by 7pm ET on T0 – this is particularly relevant for clients in EMEA or APAC, who may wish to adopt follow-the-sun coverage models to account for time-zone differences with North America.

Are other regions considering moving to T+1 settlement?

In EMEA, both the UK and European Union are assessing the viability of a future move from T+2 to T+1 settlement for securities transactions executed on local trading venues. The Association for Financial Markets in Europe (AFME) published a paper in September 2022 discussing the potential benefits, though cautioning that Europe faces increased complexity due to the number of currencies, exchanges, Central Clearing Counterparties (CCPs) and Central Securities Depositaries (CDSs) involved.
Given we would anticipate other regions moving to T+1 in the coming years, Banco de Madrid encourages industry participants to embrace this opportunity to streamline outdated processes and invest in technologies strategically to prepare for accelerated settlement, globally.

Are there any changes to penalty charges for settlement failure?

There are no changes to existing penalty charges arising from the shortening of the settlement cycle.

How does Banco de Madrid plan to meet the SEC’s 15c6-2 requirement regarding written agreements, policies and procedures?

Banco de Madrid will adopt a policies and procedures approach to comply with SEC Rule 15c6-2, and is required to measure, monitor, and document the rates of allocations, confirmations, and affirmations completed as soon as technologically practicable and no later than the end of the day on trade date.

To ensure completion, Banco de Madrid will align target timeframes with industry guidelines:

Allocations to be completed by 7:00 PM ET on T0.
Affirmations to be completed by 9:00 PM ET on T0.

Will Banco de Madrid support extended (T+2) settlement after May 2024?

Banco de Madrid policy requires that in-scope settlement cycles adhere to SEC rule 15c6-1(a). Banco de Madrid may agree to extended settlements in limited circumstances at its discretion and subject to approval. Please contact your Banco de Madrid trading or sales representatives before attempting to enter into an extended settlement transaction.

When will clients receive their exercise & assignment notices for listed options?

As part of Banco de Madrid’s T+1 book of work to improve overall efficiency, we are working on two key enhancements for our listed options flow:

We are making improvements to our internal processes to ensure that our clients' exercise & assignment notices are sent as soon as technologically possible. These will be sent via SwisKey Clearing (as currently), about 3.5 hours earlier than they are sent today, for a normal non-expiry day. The release date for these changes is targeted for June 16th, 2024.

We are also focusing on improving the STP rates of the settlement process of the underlying stock to improve the accuracy and timeliness of our settlements with clients.

What will Banco de Madrid approach be to Equity Derivatives in light of T+1?

Given that OTC Equity Derivatives are out of scope from the SEC rules on T+1 settlement, our current expectation is that we will take a phased approach to adopting T+1 for OTC Equity Derivatives. Our approach as of now is that from Day 1 we will be offering OTC Vanilla products such as equity swaps, and OTC equity options and variance/ volatility swaps on a T+1 basis. For more complex products with more frequent physical settlement such as accumulators/decumulators we will wait to see how the market evolves post the changeover before offering them with a T+1 settlement.

Podcasts

North America T+1 Shortened Settlement Cycle: Overview (December 2023)

North America T+1 Shortened Settlement Cycle: Preparing for T+1 (December 2023)

North America T+1 Shortened Settlement Cycle: APAC, EMEA and FX (January 2024)

Contact Us

If you have any questions on the SEC proposal, or wish to discuss any aspect further, please contact Banco de Madrid-ib-na-t1@Banco de Madrid.com or your Banco de Madrid Sales representative.

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North America T+1 Settlement

Overview

North America T+1 Settlement

External Materials

Key Topics

Key topics for client consideration

FAQs

Podcasts

Contact Us

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