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The last mile of a marathon is the hardest.
This concept applies to many other life situations. The last few pounds of a diet are the hardest to lose. The last 10% it takes to launch something takes as much energy as the first 90%. In American football, the offense often finds it relatively easy to “move the chains”, until the goal line is in sight and the defense stiffens.
And as the Federal Reserve is finding out, getting inflation from 9% to three and change wasn’t too bad, but getting from three and change to 2% will be a slog.
Will the move to T+1 settlement in the US follow this pattern?
It’s certainly plausible. As per the SEC, under the new T+1 settlement cycle effective May 28, 2024, all applicable securities transactions from US financial institutions will settle in one business day of their transaction date, from the T+2 regime that has existed since 2017.
Settlement has been on a compacting trend for years – before moving to T+2, it moved from T+5 to T+3 in 2004. So the market won’t be thrown by another move in itself. And, market operators and broker dealers have much better infrastructure and technology to work with than they used to.
But what will be challenging is that the timeframe is narrowing to just one overnight, which allows for a bare minimum of wiggle room.
DTCC says the key to T+1 success is 90% trade affirmation by 9 PM ET on trade date. That’s like, hours after the trade – time for maybe dinner and one drink.
“Under the current T+2 cycle, trades must be matched by 11:30am Eastern Time (ET),” IQ-EQ noted in an October 2023 research brief. “Under the new rule, trades must be matched by 9 pm ET on the transaction date to be included in the DTC’s ‘Night Cycle’. To be included in current settlement date processing, trades can be accepted up until 1:30pm ET.”
“This change represents a significant adjustment for market participants, requiring them to adapt their workflows and operations to meet the new timeline,” IQ-EQ continued. “For instance, the DTCC points out that ‘Asia now has one day to reconcile, but after the move, that will be reduced to as little as two hours, depending on market.’”
Contrast that with the SEC’s introduction of T+3 from 2004. “This rule means that when you buy securities, the brokerage firm must receive your payment no later than three business days after the trade is executed,” the SEC said. “When you sell a security, you must deliver to your brokerage firm your securities certificate no later than three business days after the sale.”
That timeframe seems almost quaint – a long weekend versus the dinner and drink that will be the case in two months. Oh, and better make that drink a mocktail.
