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SEC Clears T+2 Settlement Window, So What’s Next?

Traders Magazine Online News, April 19, 2017

Carol Penhale and Michael Calandra

The Securities & Exchange Commission’s recent vote to shorten the settlement time for stock and bond transactions to two days from three marks a new era of operational efficiency and reduced counterparty risk for the financial industry. But brokers must employ a series of steps to ensure they are fully ready for the transition, scheduled for Sept. 5.

Many industry participants in the United States and Canada have already been working to understand and prepare for the switch that will align these countries’ standards with the many other marketplaces globally that have already transitioned to a T+2 settlement cycle.  Notably, 23 European countries moved in October, 2014 and Australia in March, 2016, so the Canada and the US marketplace are behind the global settlement cycle compression curve.

Carol Penhale

For Canada and the US, many institutions still must execute several industry best practices to be prepared, including:

Testing their settlement system both internally and as part of industry testing

Educating staff and clients of the change and its effects.

Applying a stakeholder sign-off process.

Developing a paper trail to support post-T+2 implementation audits.

Accelerated settlement has been a long time coming. For 17 years, the Securities Industry and Financial Markets Association, or SIFMA, has been urging the change, which affects many instruments and financial products – not just equities - with asset-backed securities and bilateral contracts among those that will be highly affected and exchange-traded funds and mutual funds among those that will be somewhat affected.

The SEC’s Investor Advisory Committee endorsed the change in 2015 and the commission proposed its rule last fall. And it’s just a matter of time before investors must set their sights on achieving T+1 and the move to T+2 in other markets. The SEC intends to take the next three years to study “further improvements” to the settlement window, including a shorter settlement cycle to T or T+1. Commissioner Kara Stein noted that technological, operational and communications improvements exist that could enable T+1 and even end-of-the-day settlement cycles.  In advance of this potential action, markets will need to deal with other T+3 markets migrating to T+2 such as Japan and Mexico.

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