Truss Edge writes that the SEC has adopted rules changes that will shorten the standard settlement cycle for US stocks from two days (T+2) to T+1.
“The reforms come as the US regulator seeks to reduce the various credit, market and liquidity risks that have been highlighted in changed dealing volumes over the last five years.
“According to SEC Chair Gary Gensler, the new rulemaking is intended to reduce latency, lower risk and promote efficiency as well as more liquidity in the equity markets. The SEC also says it wanted to improve the processing of institutional trades, including those from hedge funds and ETFs.”
Truss Edge notes that the rules will require broker-dealers to either enter into written agreements or establish, maintain, and enforce written policies and procedures which should be reasonably designed to ensure the completion of allocations, confirmations and affirmations “as soon as technologically practicable” and no later than the end of trade date.
The changes come as the SEC seeks to make the clearing of US securities more robust than previously.
Truss Edge writes that these rules will ultimately be beneficial for the market – they can reduce settlement errors and the costs of these errors, which can impact the performance of funds.
“The changes mean that investment firms will need to automate their trade processes to ensure that trades are captured in a timely and accurate manner, as specified by the regulator,” the firm says.
Fund managers have relied historically on manual processes that can manage T+1 trading and settlement activity, but the new rules will require that the whole market receives information recorded on trade date – this will require automation and efficient process flows such as straight through processing (STP) between organisations and applications.
“Some of the demands being made now by the SEC reflect operational realities in today’s market which asset managers will need to address,” says Dave Shastri, Chief Strategist at Truss Edge. “They raise the bar potentially well beyond the reach of firms that have previously relied on manual processes.”
