Thoughts on T+1 and the SEC’s open meeting

The SEC’s open meeting of 15 February may well have produced a disappointing result – but it was not a surprise. The chosen date for T+1 implementation in the US – 28 May 2024 – could present multiple complex issues, but the widespread prediction that Labour Day in September 2024 would be specified by the SEC was always a hope – it wasn’t based on reality. The SEC always favoured the Q1 date, therefore it believes it has demonstrated flexibility.   

There were many striking features about the Open Meeting, especially for those of us outside the US:  

Firstly, it was a very domestic discussion. Only one of the Commissioners, Hester Pierce (who voted No), raised the very real issues of time-zones and FX processing. It’s widely agreed that 30-35% of US market activity is driven by overseas investors. In Germany, for example, official statistics show that more than 30% of local fund assets are invested in the US. Japan – 12 time-zones ahead of New York – has a huge interest in US assets, especially fixed income. But these issues were largely ignored. 

It is also striking that in the 314-page draft final rule and its precursor document – the T+1 Proposing Release – time-zones and FX are discussed in some detail. But this hasn’t affected the SEC recommendation.  

In addition, the Canadian market will feel very aggrieved. They are in the throes of a big technology refresh and would have preferred a Labour Day implementation – where the US and Canada share a three-day holiday weekend. Some local policymakers are saying that the earlier May date is actually worse than the earlier March date. The US and Canada markets are so inextricably connected it seems inconceivable that the two markets would have disconnected settlement cycles. But it’s now being talked about. 

The discussion about benefits to the industry was also revealing. Clearing houses and their direct members will clearly see their costs and risks fall. But will these benefits trickle down to the underlying client? Who is actually paying the bill? Not many people, outside the SEC, think this is likely.  

There was also a focus on the so-called ‘memestock’ issue. It appears to be an embedded belief at the SEC and wider policy-maker community that a reduced settlement cycle would have helped avoid or fix this issue. But where is the evidence? I’ve never seen any.  

There was one piece of data presented that explains the size of the task ahead. The US Same Day Affirmation rate (SDA) is now at 68%. This has improved substantially since I was an SDA evangelist at Omgeo in the 2010s but it needs to be very close to 100% if T+1 is going to work. It is absolutely clear that batch processing, still prevalent, has to be eliminated because the T+1 window to resolve mismatches no longer exists. T+1 settlement implies full real-time automation 24 hours per day.  

So, what happens now? I’m currently working on an ISITC Europe research project on T+1. Our findings are that awareness of the issue is very patchy – it’s high in the US but we’ve spoken to UK firms that do business in the US who were completely unaware of the initiative. In Japan there appears to be almost no knowledge of the subject. This means that, outside the tier 1 firms, no 2023 budgets or resources have been allocated. A rapid re-prioritisation project will be needed for any firm that invests into the US. The 2017 implementation of T+2 took three years to plan, test and implement. The global market now has just 15 months to complete a much more complex project.  

I expect the market, especially outside the US, will genuinely struggle to achieve the target date. The global custodian community that services the non-US investor community will be vitally important in reporting the state of readiness of their clients. The SDA rate needs to be watched very carefully – and must show a rapid improvement. I expect the buy-side community will again ask for a deadline extension and, if it can be shown that settlement efficiency will worsen, an extension is quite likely. Perhaps 2025 is a more realistic option.