Next May, on the Tuesday following Memorial Day weekend in the US, shorter settlement cycles under T+1 will begin. But it’s not the Tuesday after a holiday weekend that the industry was asking for.

Earlier this month, in letters sent to the US Securities and Exchange Commission, the Securities Industry and Financial Markets Association (Sifma), Association of Global Custodians, and Canadian Capital Markets Association advocated for a compliance date of September 3, 2024. The Labor Day holiday weekend is shared with Canada, which will also move to T+1 in 2024. In 2017, when the US and Canada moved to T+2, the transition took place over the Labor Day weekend.

Last week, in a vote of 3-2, the SEC finalized the move to T+1 but landed on a compliance date of May 28, 2024. The two dissenting votes, commissioners Hester Peirce and Mark Uyeda, indicated they couldn’t vote for the May date, citing preference for a September date and concerns that firms needed more time to make changes and participate in testing, as well as time considerations for other foreign markets to adjust.

They aren’t alone. Industry onlookers and participants tell WatersTechnology it’s not an ideal timeline for firms to make the necessary changes to middle- and back-office systems involved in the clearing and settlement processes. Existing legacy systems, manual processes, reduced IT budgets and personnel, as well lack of investment in post-trade, are just a handful of roadblocks to achieving shorter settlement cycles. Meeting the May 2024 compliance date won’t be easy, with some arguing that any timeline under two years will prove difficult.

“If you look back at the timelines of previous migrations, there’s been about 12 months between an SEC ruling and an implementation date,” says Peter Tomlinson, head of post-trade at the Association for Financial Markets in Europe (AFME). “What I think is different this time is T+1 is the biggest operational challenge so far.” Previous changes in settlement involved removing a day from the cycle between trading and settlement, but moving to T+1 means removing what was essentially the only full business day between them, he says.

“So now it requires a high level of automation or straight-through processing, and you just don’t have time to manage a significant number of exceptions,” Tomlinson says. “It’s an ambitious timeline and it’s going to be a challenge.”

The May 2024 date is likely to come as something of a shock to many in the industry as there has been a lot of pushback asking for a postponement

Virginie O’Shea, Firebrand Research

Prior to this month’s vote, firms were bracing themselves for a potential earlier date of March 31, 2024. Last February, the SEC published a proposal that would make amendments to existing rules for broker-dealers, investment advisers, and certain clearing agencies, with a view to shortening the standard settlement cycle for most broker-dealer transactions from T+2 to T+1. The comment period for those changes closed on April 11 and the SEC indicated that if the rules were adopted, the compliance date would have been end of March 2024. The proposal considered a report published in late 2021 by the Depository Trust & Clearing Corporation (DTCC), the Investment Company Institute, and Sifma that made recommendations to implement a T+1 settlement cycle in the US.

“One of the concerns with the March date was it would be the end of the quarter, so it would clash with many quarter-end financial reporting and operational processes,” says Pablo Garcia, post-trade manager at AFME.

“The May 2024 date is likely to come as something of a shock to many in the industry as there has been a lot of pushback asking for a postponement until at least September,” says Virginie O’Shea, founder and CEO of London-based fintech research firm Firebrand Research. “As Firebrand’s research indicates, the majority of banks and brokers require significant updates to their systems in order to prepare for the move.” She says smaller and midsize firms, as well as some larger ones, are likely to struggle to find the resources to implement such big changes in 14 months, especially when cuts are being made to operations and technology staffing and budgets due to the market downturn.

Evolving… slowly

Investment in post-trade has traditionally lagged investments made to improve front-office functions. “It’s sort of the redheaded stepchild,” says Sean Tuffy, industry expert and former director of market and regulatory intelligence for securities services at Citi. “It has been chronically underfunded across the industry.”

Not only has post-trade seen less investment, but as firms have attempted to adjust through the Covid-19 pandemic and recent market turmoil, cuts have also been made. “We’re seeing financial organizations make redundancies within their ops universes at the moment,” says Pardeep Cassells, head of securities and claims products at AccessFintech. “We also know that as people came back to work post-pandemic, there was a huge amount of attrition within operation functions.” She says firms will now be faced with a period where they are expected to be more efficient than ever before but with tighter resources.

“In times of economic downturn, you tend to find that the back- and middle-office functions tend to get handed quite aggressive headcount efficiency targets,” she says. Reducing headcount by about 7–8% tends to be the pattern.

But throwing more people at manual processes is also not the answer. “The firms involved have to improve their technology solutions and improve their levels of automation, and that requires investment,” Tomlinson says. “You can’t solve this by just hiring more people to run manual processes. That would be a short-term, expensive strategy.”

Investment in the emerging tech that has permeated the front office appears to be where some are going. Gurvinder Singh, CEO at New York-based trading, risk, reporting, and data management solutions provider Indus Valley Partners, told WatersTechnology last year that, where possible, firms should look to lift-and-shift monolithic applications from on-premises to the cloud. From there, the key is to re-architecture applications and services to a microservices model so they can more easily be transitioned, should the need arise, in the future. “The next stage [after the lift-and-shift] is to start carving services out that make sense, while preserving legacy monolith cores where there are no functional or performance challenges,” he says. “This is the design pattern that has been successfully implemented by many enterprise B2B firms and is the way to go for all.”

It takes quite a long time to make operations technology changes, go through a full testing cycle and be ready. So this has been a surprise by the SEC

Mack Gill, Torstone Technology

More and more providers in post-trade services are dealing in the cloud but legacy players that rely on batch processing and the mainframe are still around. “There’s a big difference in technology stacks in post-trade between a lot of the larger, older platforms, which are batch processing, and then some that are still being used by mainframe computers,” says Mack Gill, chief operating officer of Torstone Technology, a provider of post-trade processing services. In those case, he says, everything from a 24-hour cycle—trades and events—are captured and processed in one batch. One could theoretically run those batches every couple of hours but most stick to the 24-hour schedule.

Torstone is real-time-event driven, processing actions and trades as they happen, Gill says. The change of moving from T+2 to T+1 could usher more in the industry toward real-time, too. “This is one step in the move toward that and it’s a very significant regulatory-driven structural change for the industry in North America,” he says. “We firmly believe that it’s going to cause a lot of people to [look] at their tech stacks and how they do their operations.”

But Gill also recognizes that these changes won’t happen overnight. “It takes quite a long time to make operations technology changes, go through a full testing cycle and be ready,” he says. “So this has been a surprise by the SEC and there’s been a lot of lobbying by the industry to the SEC to provide ample time.”

In November 2022, Torstone and Firebrand Research released a whitepaper looking at the transition to T+1. In it they reported that a strong majority (81%) of brokers and banks active in North America use either manual processes or homegrown systems to support their post-trade processes. The paper also found that other areas that will need to see changes include corporate actions, physical delivery of securities, and trade confirmation systems.

As firms look to vendors to provide modernized services in post-trade, it’s important that vendors are truly built to provide what is needed, AccessFintech’s Cassells says. “The key thing vendors need to consider is: what is the role they’re playing in this? Are they mission critical to their clients? And can their tech stacks keep up?” she says. “One of the other things to consider for vendors is: who are their market? We know that there are still organizations instructing via fax, so how do vendors support those smaller shops that maybe don’t have a sophisticated tech stack.”

Testing, testing

As part of the transition to shorter settlement, firms will take part in testing to make sure their platforms are T+1 compliant before participating in wider industry testing by the DTCC.

Before industry testing, firms must be ready for T+1 on the enterprise level, says David Smith, managing director for capital markets at Broadridge. “You are potentially going to have some changes in procedures; you are going to have some changes in technology. All those changes and procedures need to be tested,” he says.

Any T+1 changes need to be scoped, developed, built, released, and tested, Smith says. That testing is referred to as functional testing. “Once those are done, you have to do full regression testing, front to back of your entire testing system, through settlements to post-trade, to make sure that it works from an end-to-end perspective,” he says.

The risk, though, is that firms are being forced into T+1… are folks going to become T+1-compliant without all the pieces together?

David Smith, Broadridge

Once those functional and regression testing cycles are complete, firms are ready to test with the industry. This enterprise testing, depending on the complexity of a firm, could take three to six months, conservatively. “In a perfect world, everyone would have done their impact analysis last year, everyone would have scoped out any additional work that they needed for builds, and those builds would have been done by Q1 of this year,” Smith says. “Coming into Q2, they would have been able to start doing tests of those builds and then they would have been ready by Q3 for industry testing.” Firms would have had the remainder of 2023 and 2024 up until the preferred Labor Day date to get ready. That’s not the reality.

“Just because the time has shrunk doesn’t mean the exercise has gone away,” Smith says. “I think the risk, though, is that firms are being forced into T+1. Is there validation out there that the industry is ready for T+1, or are folks going to become T+1-compliant without all the pieces together?” Running to the finish line without socks or sneakers, one could say.

Industry testing by the DTCC will begin on August 14 and will run through May 31, 2024. Testing cycles will begin on each Monday or the first business day of the week. The current DTCC testing framework indicates that there will be 21 test cycles. Participating infrastructures in the testing include DTCC subsidiaries Institutional Trade Processing and National Securities Clearing Corporation, and exchanges Cboe and Nasdaq, as well as the Options Clearing Corporation.

In a statement following the SEC vote, the DTCC said: “The SEC adopted final requirements for a May 28, 2024 implementation date for the move to T+1 settlement for transactions in US cash equities, corporate debt, and unit investment trusts. With this regulatory clarity, DTCC continues to be ready to bring this initiative forward. Accelerating the settlement cycle to T+1 will bring many benefits, including reduced risk, lowered clearing fund requirements, improved capital and liquidity utilization, and increased operational efficiency. At the same time, DTCC recognizes that significant challenges remain towards implementation and will continue to partner closely with market participants, as well as regulators, Sifma and the ICI, to promote a successful transition to T+1 and to safeguard the stability of the markets.”

The DTCC declined to comment further for this story.

As firms move along the timeline and potentially come face to face with the reality that it doesn’t work for them, there are measures in place that the SEC can use. “In the SEC toolkit, they have something called no-action letters, which they could use to delay, and it’s not unheard of for them to do this,” says Tuffy. “A cynic might say they put this aggressive date to get people started, and they might have every intention of issuing a no-action letter later this year or early next to push it to Labor Day or beyond.”