Are brokers, advisers and investors ready for new T+1 settlement rules in the USA?

In a recent article in Advisor Voice, Amanda Mark examines the impact of the shortened settlement cycle for most securities transactions in the United States.

New changes to shorten the standard settlement cycle for most broker-dealer transactions in securities from two business days after the trade date (T+2) to one (T+1) are coming into play in the USA from May 28, 2024.

This rule is designed to benefit investors and reduce the credit, market and liquidity risks in securities transactions faced by market participants.

“This move will have huge global ramifications, for both industry participants and other markets, as the changes required for T+1 are significant,” says Amanda Mark, Co-CEO of MIntegrity, a risk consultancy firm.

“The benefits are clear for Australian investors: reduced settlement risk, reduction in capital, margin requirements and collateral. It will lead to an increase in efficiency of markets, improve liquidity and provide quicker access to capital,” she notes.

However, this is causing unease amongst some brokers, advisers and investors as they don’t know what to expect or how it will work, says Mark.

“Brokers and advisers will need to navigate potential regulatory hurdles to ensure a smooth transition to the accelerated settlement cycle. One of the critical concerns is the impact on security deposits and risk management strategies. Currently, Australian brokers often use proceeds from local settlements to trade into the U.S and Canada. The trade matching, processing and settlement are fairly standard processes and are not seen as insurmountable challenges.

“It’s the regulatory consideration that weigh heavily on the industry,” says Mark.

Brokers and advisers need to be strategic about managing these challenges.

“Now is the time to get your business in order, be it a financial advisory practise or a broking firm. Improve your processes now,” she says.

Mark lists four steps that firms can undertake to be well prepared ahead of the changes.

1. Vetting of client stock and cash:

For stock that is held on Shareholder Reference Number (SRN) consider streamlining processes to eliminate delays. Review historical data to see where issues have occurred and investigate ways to improve processes. Particularly for retail clients, the broker should ensure they have access to the client’s cleared funds. Firms should consider how efficient their payment methods currently operate. Consider your current process and the number of exceptions you are dealing with for Direct Debit, Cash Management Trusts, BPay, Cheques and online payment gateways. Now is the time to remove inefficient settlement methods.

2. Note that there will be an uptick in failed settlement initially:

Firms should review what type of transactions are failing settlement. Is it SRN transfers, offshore clients with late allocations or large clients placing orders without pre allocations of trades. Address these issues now to ensure you are prepared.

3. Ensure accounts are set up prior to trading:

Firms need to fully onboard clients prior to trading including settlement instructions. For insto trades ensure you have the trade allocation prior to execution.

4. Know your accounts:

Investment managers, fund managers and other large institutions should know which accounts they are trading on before placing an order. Ensure you get the allocations up front prior to execution.