On May 28, 2024, the Securities and Exchange Commission (SEC) will officially transition the United States’ settlement cycle from two business days after the trade date (T+2) to just one business day (T+1). This change, aimed at improving efficiency and reducing risks, aligns with the efforts of other North American markets.
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In Canada, the Canadian Capital Markets Association (CCMA) has set the transition date for May 27, 2024, and Mexico’s Contraparte Central de Valores (CCV) and the Mexican Association of Brokerage Firms (AMIB) have also adopted this effective date.
Key Timelines and Standards
The Depository Trust & Clearing Corporation (DTCC) has established a strict 9:00 PM EST cutoff on Trade Date (TD) for meeting T+1 requirements. These changes affect a wide range of stakeholders, including:
- Broker-dealers
- Issuers, asset managers, custodians, and transfer agents
- Exchanges, clearing firms, and depositories
- Buy-side firms and end investors
Why Move to T+1?
The shift to T+1 offers several benefits:
- Cost Reduction: Faster settlement processes lower operational costs.
- Market Efficiency: Shortened cycles streamline operations, reducing delays.
- Risk Mitigation: Reduces credit, counterparty, and settlement risks, especially during high volatility.
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Preparing for the Transition
To comply with T+1, market participants must take proactive steps:
- Enhance Operational Models: Identify opportunities to automate processes, including trade affirmation.
- Collaborate with Brokers: Ensure clarity about the affirming party and establish effective communication channels.
- Obtain a TradeSuite ID (TSID): Apply for an institutional TSID for timely trade affirmations and record-keeping.
- Update Policies: Revise written procedures to comply with the SEC’s Exchange Act Rule 15c6-2 requirements.
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HSBC’s Readiness for T+1
HSBC has established a dedicated project team to ensure a smooth transition. The team spans front office operations, IT, and risk management functions. HSBC is actively participating in industry initiatives and market events to ensure its processes are fully aligned with T+1 readiness.
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Frequently Asked Questions
- What Instruments Are in Scope?
Instruments traditionally settling in T+2 will move to T+1. However, securities already settling in T0, such as US government instruments via the Federal Reserve, remain unaffected. - What Is the Role of the Affirmation Process?
The affirmation process ensures timely trade validation, which is crucial under T+1 for efficient settlement. - What Challenges Are Anticipated?
Key challenges include updating legacy systems, ensuring global synchronization, and addressing late trade submissions. - How Will Securities Lending and OTC Derivatives Be Impacted?
Securities lending may require faster agreement finalizations, while derivatives could face tighter operational timelines. - What About Penalties for Non-Compliance?
Firms failing to meet T+1 standards could face regulatory scrutiny or financial penalties. - Will T+1 Impact Corporate Actions and FX Trades?
Corporate actions may see expedited processing timelines, while T+1 FX trades should continue settling through Continuous Link Settlement (CLS).
Embracing the Future of Trade Settlement
The transition to T+1 marks a significant step forward for North American capital markets, enhancing resilience and efficiency. Firms must act quickly to ensure compliance with new standards, mitigate risks, and harness the benefits of a streamlined settlement process.
For detailed guidance and resources, visit HSBC’s T+1 Custody Page or consult the official SEC, CCMA, AMIB, CCV, and DTCC websites.
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