Goldman Sachs, DTCC execs dissect implications of SEC’s ‘ambitious’ settlement timeline

Conflicting time zones, potential re-papering, and weak standards are just some of the hurdles that must be overcome to move trade settlement times to T+1 or even to T+0—all potentially before Q1 2024.

In a few weeks, the US Securities and Exchange Commission (SEC) will close its comment period seeking industry input on its proposed rule that would shorten the standard settlement cycle for most broker-dealer transactions from two business days after the trade date, T+2, to one business day after the trade date, T+1, no later than the end of March 2024. In the same document, the SEC is seeking comment on how best to advance even beyond to T+1 to T+0, or end-of-day settlement.

The question is whether a mandated rule with a hard timeline is the best way to achieve faster settlement, said Brian Steele, global head of market solutions for Goldman Sachs, during Isitc’s annual Securities Operations Summit, held in Boston on Monday.

“I like the ambition. I’m not sure everyone shares that ambition,” he said, getting a laugh from attendees.

Today’s longer settlement times allow for several matches—of order execution, allocation, affirmation, and confirmation numbers—to be done on both sides of a trade before a security’s ownership changes hands and capital is transferred. While Steele and fellow speaker Michele Hillery, managing director of equities clearing at the Depository Trust and Clearing Corp. (DTCC), agree that decreased settlement time presents new and exciting technological and operational possibilities for the industry, many questions around technical implications and implementations remain unanswered and could carry downsides.

Whether the industry settles on T+1 or T+0 as its desired goal, the shift would require some heavy lifting by broker-dealers, investment managers, fund administrators, clearinghouses, and other stakeholders—as it also did in 2017, when asset classes such as stocks, bonds, and municipal securities moved from a T+3 structure to T+2.

The rule as it’s currently written introduces a contractual relationship between broker-dealers and investment managers, Steele said. And in some cases, if investment firms are in execution-only relationships with their broker-dealers, there likely aren’t contracts in place today that can simply be added to or amended.

“What does that mean? It means we have to then go out and create contracts with thousands of clients potentially that don’t otherwise have a robust contractual agreement that warrants appending this language to—which could be a significant re-papering exercise,” Steele said.

If the faster settlement rule is not adopted, there are other ways the industry could see it come to fruition. For example, the SEC could eliminate instituting a rule altogether and let the industry make its way there on its own time. There would still be financial incentives to move toward faster times, as the slower-to-adopt firms would see increased margin and higher costs to settle transactions, Steele said.

DTCC’s Hillery noted that the implications of T+1 (which is DTCC’s stated goal, according to a December 2021 whitepaper it authored alongside Sifma, ICI, and Deloitte), and T+0 to an even greater extent, are heavily dependent on time zones. The US was the last major market to adopt T+2 in 2017, but that was the easiest outcome; the rest of the world’s exchanges are always hours ahead of New York’s. If the US becomes the first to move to T+1, that dynamic inverts, she said.

That could lead to foreign clients having to make additional investments in new technologies, platforms and human capital to continue trading during US business hours. An Asia-based client 12 hours ahead of the US, for example, may need to create or invest in a system that can “follow the sun” in order to make and settle trades during US business hours.

Steele and Hillery agreed that more industry-wide standards are sorely needed in settlement, particularly around reference data, where terminology that doesn’t match—such as opposing entity or instrument identifiers—can create trade fails. There is also no industry-wide standard for settlement instructions, which are party-specific instructions that have been agreed in advance and used every time a trade is made—an area that Steele called a continuing “struggle.”

The trade settlement lifecycle feels “incredibly antiquated” for what’s supposed to be an electronically traded market, he said. One outstanding question is whether these operations processes can be responsibly sped up to a single day or less, or whether settlement should be approached with a whole new lens.

“I think this offers up the opportunity to think about how we should be operating as an industry. What are the right steps and processes that we need to be able to support these particular asset classes? And what’s the infrastructure that needs to be either enhanced or deployed or, in some cases, actually created that will help us facilitate this industry for decades into the future?” Steele said.

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