Recently UMB Institutional Custody collaborated with the Depository Trust and Clearing Corporation (DTCC) to create educational content to help investment managers understand and prepare for the transition to T+1 settlement.

Following is some background and highlights to consider as you transition.

Time, money and risk

In February 2023, the SEC adopted final requirements and rules for a move to T+1 settlement for transactions in U.S. equities and corporate debt. The accelerated T+1 settlement cycle does go into effect Tuesday, May 28, 2024.

We believe these updates are all about time, money and risk. For the industry, the changes are meant to reduce risk in the financial system, lower capital and liquidity requirements and increase operational efficiencies. For investors, anticipated benefits include a shorter time period exposed to counterparty risk, lower margin requirements and quicker access to funds.

Testing for participants

DTCC has set up a robust testing environment to help industry participants prepare, building on its experience helping clients prepare for a prior regime change from T+3 to T+2. More than five million test transactions have come onto the system so far, as more and more industry participants gear up for the transition. Smaller firms are starting to participate, joining the larger and mid-sized firms that have been active in test cycles to date.

“There’s been an incredible amount of support, collaboration and coordination across the industry. Everything from the developing of the implementation activity, the timelines, dependencies, participating in webinar series, global communication outreach, developing the industry T1 playbook.” – Robert Cavallo, Director, Clearance and Settlement Product Management, DTCC.

The actual transition

The last trading day for a two-day settlement will be Friday, May 24, 2024. Monday is Memorial Day. Then, both Friday’s and Tuesday’s trades will settle on Wednesday, May 29. DTCC is opening a “war room” and will take steps to ensure industry participants who run into problems have ways to reach out for help.

DTCC readiness

The DTCC covered some of the ways it is preparing for this change, including:

  • Identifying impacts to stock loans
  • Cross-border and foreign exchange (FX) processing (e.g., when one jurisdiction is T+1 and the another is T+2)
  • Bad path scenarios (delays)
  • Improving affirmation rates

Custodian readiness

UMB is also preparing with actions such as:

  • Industry forum participation
  • Establishing project team focused on:
    • Systemic modifications and installation planning
    • Testing with custodian platform providers
    • Testing with DTCC
    • Testing with clients
    • Client communications

Investment manager perspectives

Firms not using industry-standard trade communications or processing methods should evaluate their operating model and adjust ahead of the changeover. A kick-the-can-down-the-road approach is not going to work well in this situation.

And, even though there aren’t—at present—proposed penalties for late-settling trades in the U.S., there are still liquidity and reputation risk issues to consider.

No delays expected

It’s unlikely this change is going to be delayed. With that in mind, the message UMB is circulating is really to take action now. We’re strongly encouraging clients to review current trade coordination management processes. Consult with your custodian to understand standardized trade communication, and processing options via automation.

Investment managers should also consider talking to contacts throughout their broker relationships. Managers may have broad awareness but really need to roll up their sleeves to get focused on specifics.

Please reach out to your UMB Relationship Manager if you have any questions about planning for the shift to T+1 settlement.

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