On February 15th, 2023, the SEC adopted several changes to shorten the standard settlement cycle for securities transactions to T+1 effective May 28, 2024.
The financial services industry, in coordination with regulators, is actively preparing to shorten the standard settlement cycle from the current trade date plus two business days (T+2) to trade date plus one business day (T+1). This transition is expected to yield numerous benefits for investors and market participants, with reduced costs and liquidity requirements, increased market efficiency (including, but not limited to infrastructure modernization and standardization of industry processes), and reduced systemic, counterparty and operational risks, particularly during periods of high volume and volatility. Mizuho is prepared to make the necessary changes to bring our processes into compliance and effect a smooth transition to T+1, and will be in touch in due course if there are any actions required from our clients.
T+1 Regulation Highlights and Considerations
- Allocations for US securities should occur as soon as practicable on trade date (T+0); prior to the industry-recommended deadline of 7pm US Eastern Time.
- Trade affirmations will need to be made on the trade date (T+0), as soon as technologically practicable in order to minimize settlement failure.
- Break remediation will need to be resolved on trade date (T+0), placing great emphasis on ensuring Right First Time trade bookings.
- Foreign Exchange: a shorter settlement cycle impacts cross-currency transactions which have an FX component. FX trades, which currently settle on T+2, will either need to be booked on the same day/T or alternatively pre-funded, meaning all participants in the settlement chain will need to confirm the transactions on T+0. Firms without US-based operations may need to adjust staffing and processes to match US Eastern timeframes.
- Securities Lending: The compressed timeframes for loan recalls/reallocations settlements currently rely on bilateral processes between custodians and third-party lending agents, as well as between the borrowers and the vendors. Moving to T+1 cycle compresses the timeline to identify and recall securities. A modification to existing loan recalls and reallocations process, technology and overall behavioral changes are needed to avoid breaks in the process, which could result in an increase in settlement fails and cash penalties.
- Corporate Actions: Ex-Date and Record Date will be the same day, meaning that firms will need to review market practices around corporate actions notifications and responses to events with their custodian and update the key dates. Failure to do this could result in a significant increase in reverse market claims.
- Canada and Mexico: have both recently announced a T+1 compliance date of May 27th 2024, one day prior to the U.S. compliance date.
FAQs
Q: What is T+1?
A: In response to early 2021 market fluctuations, the US Securities and Exchange Commission (SEC) proposed adjustments that included shifting to a shorter trade settlement cycle.
Currently buyers and sellers exchange money and process financial instruments during the settlement window of T+2. The proposed change aims to settle trades one day earlier, T+1, reducing the time for ownership transfer.
The SEC, on February 15th, 2023, announced the US transition to T+1 scheduled for May 28th, 2024, allowing a 15-month period for industry and market participants to implement and test required operational and technological changes for the accelerated settlement.
Q: Which products will be impacted by T+1?
A: The T+1 shortened settlement cycle impacts a range of products, encompassing equities, corporate and municipal bonds, unit investment trusts, and financial instruments comprised of various security types. You can find a detailed list on the DTCC website – T+1 Product List.
Q: Which markets are affected?
A: The US, Canadian and Mexican securities markets will be impacted by T+1 changes, therefore anyone operating in these markets may be affected.
Both Canada and Mexico will go-live with T+1 on Monday, May 27th, 2024, while the US will go-live the following day on Tuesday, May 28th, 2024.
In EMEA, both the UK and EU are assessing the viability of a future move from T+2 to T+1. 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, and in March 2023 established a T+1 industry task force to assess next step.
Brazil and other LATAM markets have not yet addressed their intentions regarding transitioning to a T+1 settlement standard.
Q: What are the key changes for Clients and Counterparties?
A: Key changes include:
- Industry has recommended the following best practices:
- Same day allocations by 7pm ET
- Same day affirmations completed no later than 9pm ET
- Less than 24 hours to remediate any trade errors and prevent failure, compared to 48 hours in the current T+2 settlement cycle
- Written agreements or policies and procedures requiring allocations and affirmations as soon as technologically practicable and no later than by the end of trade date
- Requires investment advisors (buy-side firms) to maintain records of confirmations received and allocations and affirmations sent
Q: Will there be exceptions for clients outside of North America, or who are in different time zones?
A: All clients trading in eligible products will be subject to T+1 changes without exception
Q: What are some of the challenges the industry anticipates with the transition to T+1?
A: We encourage all clients to review industry resources to better understand how the change will affect them. Some of the challenges raised across the industry include:
- Cross-border transactions (ADR/ORD, ETFs, etc)
- FX markets
- Increased Settlement fails if operational and technological issues are not properly addressed
- Increased cost of settlement
- Increased liquidity costs, and increased cost of collateral, funding and securities lending
Q: Will there be penalties for late settlements after T+1 goes live?
A: No changes to existing penalty charges have been implemented from the shortening of the settlement cycle. Buy-in risk rules will continue to be in effect as usual.
Q: What does T+1 transition mean for securities lending?
A: If loaned securities are recalled, these will need to be identified in a shortened timeframe.
Q: What does T+1 transition mean for FX?
A: FX cut-off times will not change for the global markets. FX transactions will continue to settle on a T+2 basis, and the T+1 transition increases the chance that transaction funding dependent on FX settlement may not occur in time, especially during busy periods. Firms should consider the potential increase in operational risk across all aspects of their FX trading processes, including sales, trading, pre-, and post-trade operations, payments, and settlement. We encourage buy-side firms to review the FXPA Buy Side Guidance in Preparation for T+1 Settlement.
Q: How can I prepare for T+1?
A: We recommend that all market participants take the following actions to prepare:
- Familiarize yourself with industry timelines, expectations and considerations
- Review internal operating models to ensure their alignment with the T+1 change
- Ensure you have a plan to comply with the change
- Discuss any concerns with your service representative or sales contact
Q: How can I reduce the risk of settlement failure following T+1?
A: Ensure that allocations and affirmations are provided as soon as technologically possible on Trade Date. It is also recommended that settlement processes be automated by using post-trade solution technologies.
Q: How is Mizuho preparing for T+1?
A: Mizuho has completed a through impact assessment of all potentially affected business process and identified the high-level changes required to bring our process into compliance and affect a smooth transition to T+1. We have established an MUSO-wide program team that is focused on making the necessary changes.
Q: Will Mizuho standing settlement instructions change?
A: Mizuho’s settlements instructions will not change. We highly encourage all of our clients to provide us with settlement instructions for allocations at the time of trading, or prior to placing an order as this can prevent delays in trade date matching or allocation.
Q: Will Mizuho accept orders with settlement date of T+2 after May 28th, 2024?
A: Extended settlement will continue being available where appropriate, subject to Mizuho’s policies and procedures. Before executing any order with extended settlement, please consult with your sales contact or client service representative.
Q: Where can I learn more about T+1?
A: We have compiled a list of links under “External Materials” that will direct you to various industry resources.
External Materials
SEC Final Rule
DTCC - US T+1 Settlement Industry
DTCC - FAQs
SIFMA: Accelerating the US Securities Settlement Cycle to T+1
SIFMA: Industry Implementation Playbook
ICI Statement on T+1 Settlement Cycle
Canadian Capital Markets Association
Contraparte Central de Valores of Mexico
Contact Us
If you have any questions on the SEC proposal, or wish to discuss any aspect further, please contact us at Mizuho T1 Readiness [email protected]