T+1: Impacts of the shortened settlement cycle in the US

These impacts must be anticipated, and SGSS will adapt its processes accordingly.

Societe Generale Securities Services (SGSS) is supporting its clients to enable them to manage the adaptation of their operating models to this new US standard and increase process automation when possible.

Why this shortened settlement cycle in the US?

During the settlement cycle, the time between trade execution and settlement corresponds to the risk for a trading counterparty to potentially become insol­vent. In a nutshell, the longer the settle­ment cycle, the greater the credit and op­erational risks attached to the trade.

This time/risk dynamic impacts the amount of margin and collateral required by the Central Counterparty Clearing House (CCP) for mitigating the risk on the securities trade.

This transition is intended to reduce systemic risk associated with the use of capital and reduced inefficiency, improving the process across trading and post trading in US securities.

What opportunity for the industry?

The move to a shorter settlement cycle in the US creates an opportunity to re-engineer IT solutions running day-to-day trades and settlement.

The required increase in processing efficiency will lead to improved use of technology and automation (this is a perfect time to push towards SWIFT and secure file transfer protocol (SFTP) communications), which reduce turnaround times. This review of the tools’ functionality looking to internationally adopted standards will also mitigate the risk and hopefully reduce failed transactions: broader benefits are forecasted where a Straight-Through Processing (STP) achievement will be granted for cross-border transactions. As of today, the main issue is the lack of STP for cross border transactions as each Central Securities Depository (CSD) has its own cut off and template.

What are the main operational impacts for the securities industry?

Shortening the US settlement cycle may have a significant impact on several areas, including method and timing around trades (buy and sell detail confirmations) notifications and recalls (for securities on loan).

• Trade notifications:

Brokers and asset managers will have to transmit confirmation to their settlement/lending agents possibly several times during the day on the trade date (“T”) to ensure that the recall due date and the contractual settlement details matching element are aligned.

• Recall issuance:

Need to review contractual obligated timelines issuing recalls.

• Settlement flow:

Same-day affirmations inclusive of new procedural and recordkeeping requirements (including date and time stamping of allocations and affirmations) are some of the most challenging parts of the Securities and Exchange Commission (SEC) rules to ensure readiness for US T+1 settlement. Different options exist to process trades: the issue of affirmations is generating an active debate, although it is clear that is an option offered by the US market; the SEC requires date and time stamping.

This is where SWIFT and SFTP communications become critical.

To avoid any “urban legends” regarding T+1 implementation, we need to emphasise that even in today’s environment, some US securities trades fail despite being supported by a sophisticated trading infrastructure. This is primarily due to:

• Inaccurate/incomplete standard settlement instructions

• Failed securities delivery despite matched instructions

• Unknown trade (DK’d) or not matched by the counterparty.

Impacts of the compressed timeline trade funding and cross currency foreign exchange execution will be crucial to synchronise fund investor and securities settlement cycles. Any non-automated link in the chain will put all actors under increased operational pressure.

SEC has not incorporated fail penalties, but this does not mean there is less incentive to comply with T+1 settlement deadlines: fails can create liquidity issues, reputational and financial risks, and the SEC might intervene in the case of repetitive fails.

What possible impact for Investors?

• On liquidity 

A liquidity mismatch occurs for funds where the settlement cycle of the fund and the underlying portfolio securities follow different settlement cycles.

UCITS and AIF rules restrict the cash amount held by a portfolio with any institution to 20% of net assets and borrowing is limited to 10% of net assets. Mismatches in settlement may result in breaches of these funds rules when a substantial portion of the basket settles on T+1 and primary orders settle on T+2. Banks and custodians are not committed to cover funds’ excess cash balances or overdraft requirements.

Following the SEC’s decision to shift the US to a T+1 settlement cycle, many asset managers are discovering how decoupling the cycles of the two largest trading markets and liquidity pools brings additional operational complexities.

• On Forex

Non-US clients will have to pay in USD, meaning there will be a need for a FX trade that will have to settle on the same date (i.e. T+1). But in order to benefit from the night settlement cycle, the amount in USD shall be available on T evening.

• On Corporate actions

Because of the shortened timeframe between ex-date and record date, firms will have to review market practices around corporate actions (notifications and answers to events) with their custodian. If not, a significant increase in market claims may occur.

These changes could push Global Banks and Asset Managers to review their security trading, Forex programme and trade management processes, to confirm that all workflows are effective from a risk mitigation perspective and efficient from the broader operating model perspective, in order to have enough time for a review if necessary.

Even though the US market is a single country with a single currency, investment flows in and out from the entire world every day, making the US T+1 shift relevant for almost every trading entity in the world.

Europe has launched its own thought process

The decision made by the US has open the door for reflection in Europe. It was therefore not a surprise when the European Securities and Market Authority (ESMA) launched its own T+1 call for evidence asking industry’s opinions about the costs and benefits of such a move. The United Kingdom has already mobilised an industry “taskforce” to assess an acceleration of its own settlement cycle.

The synchronisation of various currencies, centralised securities depositaries, CCPs, and trading venues makes the potential European T+1 far more complex than the US version. The response to this T+1 call for evidence will be crucial for discussions on the matter.

ESMA has pledged to publish its final report, based on the call for evidence responses, by January 2025, at the latest; changes in US & Canada settlement cycle monitoring remain the primary focus.

How can SGSS support you?

The impacts have been assessed (impact on liquidity, security trading, Forex process, STP rate, trade management process…) leading to the adaptation of our operating models to this new US standard.

SGSS, as a custodian, already operates using STP processes, allowing our clients’ instructions to be sent as swiftly as possible to our sub-custodians.

Consequently, the affirmation model used by SGSS today is very fluid: our sub-custodians in the US, directly connected to DTCC¹, affirm the transactions on behalf of SGSS. Therefore, no adaptation is envisaged for SGSS: our clients will continue to benefit from this settlement service under T+1.

In order to meet the new deadline for transactions’ affirmation, SGSS will increase its working window with a European nightshift team until 00.00 CET. The aim of this adaptation is to allow clients to benefit from SGSS’ support in case of fail or unmatched instructions. It will notably allow our clients to send their instruction on T evening to ensure the affirmation of their transactions on time.

Our sub-custodians also offer us an alternative model of self-affirmation: the client performs the affirmation themself but sends the settlement instruction to their custodian to allow the settlement. SGSS manages to implement this model, which could allow more flexibility for our international clients, especially non-European ones, with its sub-custodians.

In addition, SGSS today offers an auto-FX service that will be fully adapted to deal with FX needs aligned with the T+1 settlement process.

SGSS is committed to supporting its clients at every step of this journey towards the new settlement cycle. To this end, SGSS will keep communicating regularly on what our clients must do to get ready for T+1 and will meet clients in order to discuss with them the operational stakes regarding their current and future activity and to answer questions.

Your usual SGSS relationship managers are at your disposal to accompany you on this matter.

Paola Deantoni
Senior Advisor, Public Affairs - Societe Generale Securities Services