T + ?
Get ready for U.S. stock trades to settle the next day. This is a change from the standard that feels familiar, but with a new twist. Let’s get started.
Think back to 1995, when settlement times for U.S. stocks went from T+5 to T+3. Since the change, people have talked about making this period even shorter, to T+1 or even the same day. The goal was to reduce risk and make the market work better. But it had its share of critics who said it would raise costs, bring in new risks, and leave no room for wiggle room when the market was unstable. The 1993 blast of the World Trade Centre still hangs over Wall Street and makes many people think twice.
Turn of the century sets the stage
As the new century began, Jesse Forster, Senior Analyst from Coalition GreenwichI helped write a white paper called “T+1, next-day settlement, and the move towards straight-through processing.” When he first joined PricewaterhouseCoopers’ Financial Services & Technology practice, his first job was to help the Securities Industry Association (SIA), which is now SIFMA, plan for the year 2000. He was in charge of a project, and the week before New Year’s Eve, he worked at the 55 Water Street command center.
As the new century began, he was given David Weiss’s groundbreaking book “After the Trade Is Made” and given a job as a negotiations expert. The SIA gave them a new project: looking into whether or not they could move to T+1 by 2005.
Then, in a strange turn of events, the terrible events of September 11 changed his job. The financial business needed a new command center right away, so he was quickly given a new job.
The events of 9/11 showed how important it is for U.S. markets to be efficient and strong. Over the next few years, the business thought about shortening the time it takes to settle as a way to reduce risk. In 2004, the SEC sent out a Concept Release asking for public feedback on the costs and benefits of making the settlement cycle quicker
In response, SIA changed its goal to making straight-through processing (STP) happen across the business as a whole. They hoped that every step of a trade, from execution to settlement, would be done automatically for all parties. Instead of specifically aiming for T+2 or less, it was thought that the industry would gain from setting benchmarks like same-day confirmation to reach STP over a number of years.
The SEC took back the concept release and decided to look at the problem again when technology had changed enough in the industry to make a shorter settlement period possible.
Taking a new look at things from the past—the industry is now ready
Jump ahead to 2017. The SEC suggested a change to T+2 because the memory of the global financial crisis was still fresh. The plan was approved by everyone and put into action in September. The recent pandemic market shock, the rise of meme stocks, Robinhood’s controversial trade halt on GME, and the worldwide blockchain craze all showed how weak the current settlement process is.
The T+1 approach can be seen and sounds good. It makes a big difference in how much cash retail brokers need. DTCC thinks that the volatility component of the NSCC margin requirement will go down by 41%, which could save member firms billions of dollars.
So, why is this T+1 different? A key reason is that T+1 has a lot of support from the business world. In a survey done before the SIFMA Insights conference, T+1 came out as the top concern for operations and technology. The business has spent countless hours and more than 30 years planning carefully and learning how to cut down on settlement times. The people in the market now know how complicated this process is.
Technology has made huge leaps and bounds, making securities handling much faster and more efficient. The business is finally ready to take on the challenge of a shorter cycle because it has a more advanced and automated infrastructure.
Beyond U.S. equities
Other markets are making moves towards T+1 settlement as well. The U.S. effort is for all kinds of securities, including fixed-income markets. Canada has set its start date for May 27, 2024, which is a day before the US. The Association for Financial Markets in Europe (AFME) is also thinking about switching to T+1. They see it as a matter of time, not choice. The rise of digital assets and ledger technology is pushing the industry to streamline processes across equities and other asset types.
People are tired of talking about plans for the stock market and the MiFID II no-action letter over and over again. Even though there aren’t many rules about stocks right now, companies can still be productive while they wait for more direction. Even though summer isn’t usually the time for new projects, it’s a good time to think about what might happen and get ready for the upcoming shorter settlement cycle.