Tonic’s expertise-led T+1 services help our clients to accelerate high-quality compliance, via future-proofed settlement and post-trade infrastructure solutions.
SEC’s T+1 Rule Amendments
In February 2022, the SEC proposed a ruleset that will shorten the standard US settlement cycle to one business day, from two business days. A year later in February 2023 the SEC officially adopted the rules establishing May 28th 2024 as the effective compliance date for the T+1 rules.
The proposals were part of the SEC’s market structure review and are designed to protect investors, reduce risk, and increase operational efficiency. The T+1 changes will impact all participants across the full end-to-end settlement lifecycle.
Current Settlement Challenges
The end-to-end settlement lifecycle is often complex and is run on siloed, legacy infrastructure within firms. Under-invested settlement infrastructure can result in manual and unscalable business processes, high operational risk, outdated and inaccurate data, all of which are magnified via the involvement of multiple intermediaries such as custodians, brokers and clearing houses.
These existing challenges drive regular settlement fails today, with fails volume and fails impact increasing in times of stress and high volumes.
So, what are the key SEC T+1 rules?
T+1 obligations are a mixture of amendments to existing rules and new rules, that will impose requirements on firms across four key categories.
1. Reduced Settlement Cycle
In implementing T+1 the SEC has amended existing rules to:
· Reduce the standard settlement cycle to one day
· Exclude security-based swaps from the requirements
· Shorten the current exception to the cycle for firm commitments priced after 4.30pm from four days to two days
2. Same-Day Affirmation
The SEC has adopted a new rule that requires parties to complete allocations, confirmations no later than the end of the day of the trade. To promote this objective the rule requires broker-dealers to either;
· Enter into written agreements with parties that formalise these requirements, or
· Establish internal procedures that enforce the same-day affirmation deadline
3. Recordkeeping
The SEC has amended another rule under the Investment Advisers act that requires registered investment advisers to make and keep a record of all allocations, confirmations and affirmations. This includes requirements such as:
· Records must be date and time stamped
· Advisers must keep the originals of all written records received
4. Straight-Through Processing
The SEC has adopted another new rule that targets increased straight-through-processing (STP). The new ruleset requires clearing agencies that provide a central matching service (CMSPs) to meet the following key rules:
· Establish, maintain and enforce policies and procedures to facilitate STP
· File annual reports that contains qualitative and quantitative information regarding STP performance
· Provide details on STP enhancement delivery plans for the next 12-month period
Challenges with T+1 Implementation
A common T+1 challenge for firms will be their legacy settlement infrastructure.
Any existing operating model challenges, such as manual, unscalable processes or inadequate data, will be further exposed and magnified by the introduction of the T+1 rules.
As a result, the T+1 rules will often require firms to deliver end-to-end operating model transformation, including to multiple upstream functions, technology and business processes.
Firms must address process and data weaknesses across the front-to-back trade lifecycle, to ensure both compliance and future volumes scalability.
In addition to direct settlement infrastructure challenges above, firms must also consider the consequential impact on ancillary functions and processes, such as corporate actions, FX and cash funding, to name but a few.
Cost of Failure
Compression of the settlement cycle inherently increases the risk of trades failing. With overnight interest rates at their highest levels in many years, the impact of interest claims on these failed trades will have an increased impact on firms’ P&L.
Concurrently, firms will be paying attention to the ongoing settlement performance of their counterparties. As the saying goes, “It takes two to tango”, and so ‘failing’ firms, that are observed to consistently contribute toward settlement failures and inherently regulatory breaches, will become less attractive to transact with.
Why TONIC?
Tonic is an expertise-led Capital Markets consultancy that specialises in defining and delivering complex infrastructure transformation, especially across the post-trade domain.
We leverage genuine expertise across the front-to-back trade lifecycle to provide a superior service model for our clients.
But what does that mean for T+1?
Tonic practitioners’ deep domain and transformation expertise, combined with our vast experience across the front-to-back trade lifecycle - including inventory, settlement and custody infrastructure - enable us to accelerate high-quality, tailored T+1 solutions for our clients.
Tonic Service Features
• Deep end-to-end domain expertise, including inventory, settlement and custody infrastructure
• One-stop-shop T+1 Implementation partner
• Tailored solutions, driven by your firm’s needs
• Modular service approach
• Industry benchmarking and access to our full industry network
• Advisory services, including digital solutions
• Client-centric, flexible service model
• Scale-up/scale-down resourcing
T+1 Opportunity
At Tonic we suggest in-scope firms should use SEC T+1 as an opportunity to augment legacy settlement infrastructure, in order to:
• Future-proof settlement infrastructure, to meet current and future regulatory obligations across all jurisdictions
• Ensure operating model scalability, to support long-term volumes growth and any future stress market scenarios
TONIC Approach to T+1
For T+1, Tonic will leverage our TonicX transformation methodology, designed and iterated via a wide variety of Tonic transformation programs
• TonicX provides a high quality, structured approach to accelerate transformation, which we tailor per client to maximize execution success
• We break out our TonicX delivery cycle into a flexible suite of modular services, with clear, agreed deliverables for each
TONIC T+1 Health Check
An early T+1 priority for all firms will be identifying any weaknesses within the current settlement infrastructure across all in-scope products, as a necessary step to identify and prioritise required improvements.
The Tonic Health Check delivers a T+1 impact assessment for firms, producing a consolidated view of all areas requiring T+1 driven change. We do this via accelerated front-to-back current state analysis of existing settlement infrastructure and future change.
Within the Health Check we cover the full settlement operating across
· IT – Current architecture and any planned upgrades
· Data – Inbound, outbound and MI
· People – In-scope teams, roles & responsibilities
· Process – Manual tasks vs STP, controls and exception management
· Governance – KPIs, KRIs, SLAs and escalation models
The Health Check also includes a deep-dive analysis of your firm’s current settlement statistics, to evaluate performance against the new regulatory obligations across products, systems, teams and clients.
Next Steps
Come speak to us at info@thetonicconsultancy.com for an informal chat about how our service proposals can help your firm accelerate a high-quality T+1 implementation.
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