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The settlement period for in-scope securities traded on the secondary market in the United States (US) is currently trade date plus three business days, commonly referred to as T+3. The financial services industry, in coordination with regulators, is planning to shorten the settlement cycle to trade date plus two business days (T+2) on September 5, 2017. The products subject to the shortened settlement cycle include equities, corporate bonds, municipal bonds, unit investment trusts, and financial instruments comprised of these security types. Shortening the settlement cycle is expected to yield benefits for the industry and market participants including reduced credit and counterparty risk, operational process improvements, cash deployment efficiencies, increased market liquidity, lower collateral requirements, and enhanced global settlement harmonization.
Additional Information About Product Scope:
Yes - The Canadian Capital Markets Association (CCMA) is coordinating the Canadian Markets move to a T+2 settlement cycle along with the US in Q3 2017. The Industry Working Group includes participants from the Canadian Market, and the work done for the Playbook will play a role in their planning and efforts moving forward.
Generally, a transition to a T+2 settlement cycle will align the US market with other major international markets that currently operate in a T+2 environment. Twenty-three European Union (EU) member states moved to a T+2 settlement cycle in October 2014, including Austria, Belgium, Czech Republic, Cyprus, Denmark, Estonia, Finland, France, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Lithuania, Luxembourg, Norway, Portugal, Slovakia, Sweden, Switzerland, the Netherlands, and the United Kingdom. Spain is expected to complete its transition to T+2 settlement in Q4 2015. However, there are some markets that will remain at a T+3 settlement cycle. For those markets, the US settlement cycle will come out of alignment when it moves to T+2 settlement, and firms should plan accordingly. Firms are encouraged to consider the impact of market settlement cycles when trading or processing transactions in securities eligible to settle in more than one settlement location.
No. Agency CMOs are not in-scope for the move to a shorter settlement cycle. Agency CMOs settle through the Federal Reserve Wire Network, known as "Fedwire." The settlement conventions of Agency CMOs will not change in the move to a shorter settlement cycle. Separately, CMOs not issued by Fannie Mae, Freddie Mac or Ginnie Mae - issued by Banks and often called "RMBS" or "Private Label" CMOs – settle at the Depository Trust Corporation (DTC) and are in-scope for the move to a shorter settlement cycle.
To determine the list of products in-scope for the industry’s move to T+2, an Industry Product Working Group was established comprised of close to 100 industry representatives from multiple market segments. The group reviewed product lists from multiple firms and solicited input from industry experts. The group ultimately agreed on a list of the “cash” products in scope for the move to T+2. The group also suggested a review of the OTC derivative products to determine the impact, if any, of the industries move to T+2. This work is on-going.
No, the settlement cycle for Fed-eligible products is not expected to change.
Yes. The regulators essential for the move to a shorter settlement cycle are fully committed to making the necessary changes to their respective rule-sets in a timely manner. The Securities and Exchange Commission will shortly propose a change to the keystone settlement cycle rule, Rule 15c6-1. Impacted Self-Regulatory Organizations (SROs) including the Financial Industry Regulatory Authority, the NASDAQ, and the New York Stock Exchange, have analyzed impacted rules, and sought industry feedback on the rule changes they plan to make to facilitate a shorter settlement cycle. These SROs plan to submit proposed rule changes to the SEC shortly, and have taken care to ensure that rules are consistent across their respective memberships. The MSRB (Municipal Securities Rulemaking Board) has already submitted and received approval from the SEC regarding its impacted rules.
Separately, banking industry regulators, the OCC (Office of the Comptroller of the Currency) and the FDIC (Federal Deposit Insurance Board), have indicated that they will change their respective rules, which currently reference a T+3 settlement, to a T+2 settlement, when the SEC makes its changes to the keystone rule, Rule 15c6-1.
T+2 and ATG are separate, albeit parallel, efforts with no dependencies on each other. T+2 or ATG could be implemented independently without impacting the development efforts or testing plans of members.
Furthermore, it is important to note that, while the two efforts likely have offsetting impacts on margin savings, they should not be linked for purposes of any economic analysis. Both ATG and T+2 demonstrate their own industry business cases.
The industry's move to T+2 will not require a change to Regulation SHO or SEC Rule 204. However, the close out periods contained within Rule 204 will accelerate when measured from trade date, since Rule 204 close out periods are measured from settlement date.
Generally, Rule 204 requires brokers and dealers that are participants of a registered clearing agency to take action to close out failure to deliver positions. Closing out requires the broker or dealer to purchase or borrow securities of like kind and quantity. The participant must close out a failure to deliver for a short sale transaction by no later than the beginning of regular trading hours on the settlement day following the settlement. If a participant has a failure to deliver that the participant can demonstrate on its books and records resulted from a long sale, or that is attributable to bona fide market making activities, the participant must close out the failure to deliver by no later than the beginning of regular trading hours on the third consecutive settlement day following the settlement date. If the position is not closed out, the broker or dealer and any broker or dealer for which it clears transactions (for example, an introducing broker) may not effect further short sales in that security without borrowing or entering into a bona fide agreement to borrow the security (known as the “pre-borrowing” requirement) until the broker or dealer purchases shares to close out the position and the purchase clears and settles.
While certain SEC reference materials on Rule 204 reference close out periods based on trade date in a T+3 settlement environment, the timing of the close out provisions in Rule 204 (17 CFR 242.204) turns on settlement date, which is currently T+3, and following the shortening of the settlement cycle will be T+2:
Short Sales: Rule 204(a) A participant of a registered clearing agency must deliver securities to a registered clearing agency for clearance and settlement on a long or short sale in any equity security by settlement date, or if a participant of a registered clearing agency has a fail to deliver position at a registered clearing agency in any equity security for a long or short sale transaction in that equity security, the participant shall, by no later than the beginning of regular trading hours on the settlement day following the settlement date, immediately close out its fail to deliver position by borrowing or purchasing securities of like kind and quantity.
Long Sales: Rule 204 (a)(1) If a participant of a registered clearing agency has a fail to deliver position at a registered clearing agency in any equity security and the participant can demonstrate on its books and records that such fail to deliver position resulted from a long sale, the participant shall by no later than the beginning of regular trading hours on the third consecutive settlement day following the settlement date, immediately close out the fail to deliver position by purchasing or borrowing securities of like kind and quantity;
Bona Fide Market Making Activity: Rule 204 (a)(3) If a participant of a registered clearing agency has a fail to deliver position at a registered clearing agency in any equity security that is attributable to bona fide market making activities by a registered market maker, options market maker, or other market maker obligated to quote in the over-the-counter market, the participant shall by no later than the beginning of regular trading hours on the third consecutive settlement day following the settlement date, immediately close out the fail to deliver position by purchasing or borrowing securities of like kind and quantity.
In a T+3 settlement environment, the close out for short sales is prior to 9:30ET on T+4, settlement day plus one, and 9:30ET on T+6, settlement day plus three, for long sales and bona fide market making activity.
When the settlement cycle shortens to T+2, these timeframes will contract to prior to 9:30ET on T+3 for short sales and prior to 9:30ET on T+5 for long sales and bona fide market making activity.
Please see the letter to the SEC, composed by SIFMA and ICI, dated June 18, 2015: for more details.
It would be assigned a settlement date of T+3.
T+2 will not impact any CMU output.
Yes. Today CMU is able to match and settle T+2 trades, T+1 trades and even T+0 trades (though they will not settle at NSCC).
No. There will not be any changes to CMU's interface with the MSRB.
No. There will be no changes to memo seg processing resulting from the move to T+2.
There will be no changes to RAD processing resulting from the move to T+2.
For IMS processing, the Deliverer’s authorization profile for institutional trades will occur 30 minutes earlier than it does today (from noon to 11:30 ET on SD-1).
No. There will be no changes to DTC’s night-cycle and night-cycle output resulting from the move to T+2.
Yes. DTC’s DO process will not change under T+2.
Omgeo made this decision in order to align the affirmation cutoff with NSCC’s Consolidated Trade Summary (CTS) Cycle 3 cutoff, which occurs at approximately 11:30 AM ET.
Prior to the implementation of T+2, the CTS will be enhanced with changes stemming from the CTS Re-write initiative, which will become effective on June 23, 2017.
The enhanced CTS Cycle 3 will display each Member's one-day-settling trades (trades received by NSCC’s Universal Trade Capture (UTC) System prior to 11:30 ET on SD-1), in addition to their same-day-settling trades (trades received by UTC prior to 11:30 ET on SD), which are already reported on the CTS Cycle 3.
Changing the affirmation cutoff will ensure that "Regular Way" Prime Broker trades, affirmed by 11:30 ET on SD-1, will be included on the CTS Cycle 3 for one-day settlement.
T+2 will not change the rules governing the eligibility of securities and clients for the ID Net Service.
Institutional trade affirmation rates were reviewed as part of the T+2 requirements phase and the industry determined the only change required was to move the affirmation cutoff from noon ET on T+2 to 11:30 ET on T+1.
None. The Obligation Warehouse (OW) bases all of its calculations on settlement date (SD) and not on trade date (T) and "Settlement Date" is a required field for matching.
No. The CTS file formats will not change for T+2, however, they will change under the CTS Re-write Initiative, which will launch prior to T+2, on June 23, 2017.
Under the CTS Re-write initiative:
Additional information about the CTS files is available on the DTCC Learning Website.
The CTS Re-write initiative will introduce the concept of "Net Reason Code," which includes numerous enhancements to provide Members with more transparency about why a particular trade was not included in netting.
Additional information about the CTS files is available on the DTCC Learning website.
Specific CTS-related changes for T+2 include changes to the time the summary of trades is reported to members, when viewed from a Trade Date (T) perspective.
From a Settlement Date (SD) perspective, the CTS will continue to be issued on SD-2 for "Regular Way" trades.
As an example, "Regular Way" trades are currently reported on the CTS on the night of T+1. Following the implementations of the CTS Re-write and T+2, "Regular Way" trades will instead be reported on the very next issuance (cycle) of the CTS after the trade is received by NSCC.
No, the format of the existing CNS Projection MRO file (AutoRoute #02042002) will not change for T+2.
However, as noted in the DTCC's Functional Changes whitepaper the "Following Day’s Settling Trades" and "Following Day Settling Trades Sign" fields will become obsolete and filler under T+2.
No, the new CNS Midday Projection File is entirely optional for firms to subscribe to. Each Member can decide if (and how) they will use this new report.
The new CNS Midday Projection File will include one-day-settling trades and miscellaneous activity (e.g. ID Net trades) received by CNS on SD-1 between CTS Cycle 2 and Cycle 3.
The CNS Midday Projection File will not be available in a print image format. It will only be available as Machine Readable Output (MRO) and Comma Separated Value (.CSV) files.
They are located on DTCC’s website, MRO record layout and .CSV file layout, under the CNS/Non-CNS Settlement Account section.
The Consolidated Trade Summary issued on Tuesday, September 5, 2017 at approximately 21:00 ET will include the trades designated for the double settlement day that will occur on Thursday, September 7, 2017.
No. T+2 will not impact/change the header information on the CNS Projection Report.
Equities exchanges and trading platforms do not need to make changes for T+2.
Currently, they submit matched equities transactions to NSCC's Universal Trade Capture (UTC) System, which contain settlement indicators, e.g. "Regular Way" and "Seller's Option." UTC interprets these indicators in order to assign the appropriate settlement date to each transaction.
Under T+2, UTC will assign a SD of T+2 to transactions received from exchanges and trading platforms that contain a "Regular Way" settlement indicator.
Under T+2, UTC will continue to accept and process transactions that do not settle on a T+2/"Regular Way" basis.
Settlement could take place on a "Cash"/same-day, "Next Day"/T+1 or "Seller’s Option"/T+3 through T+180 basis.
No. T+2 will not impact how OCC and NSCC process option trades, exercises and assignments.
No. T+2 will not change the timing of UTC output or reported values.
The "Settlement Days" field provides UTC with information to assign the appropriate SD to transactions, based upon the Trade Date (T) and the number of days specified in this field.
Under T+2, a "Seller's Option" trade with a value of 003 days in the "Settlement Days" field will be acceptable because T+3 will be considered a "Seller's Option" trade, while today it is considered to be a "Regular Way" trade.
Under T+2, a value of 002 days in the "Settlement Days" field will be rejected as a "Seller's Option" trade because it should be designated as a "Regular Way" trade.
T+2 will not impact the different types of NSCC netting.
NSCC will continue to determine "Settlement Location" based upon: type of trade, time it was received by UTC and reported on the CTS and if the security is undergoing a corporate action or dividend distribution.
Under T+2, the vast majority of trades received by UTC will continue to settle in CNS (Continuous Net Settlement).
Trades that do not settle in CNS will continue to settle via the balance order accounting system, as one of the following:
Changes to UTC specifications with regard to T+2 are described beginning on page 5 of DTCC's Shortened Settlement (T+2) DTC, NSCC and Omgeo Functional Changes whitepaper, which is posted on UST2.com.
No. There are no system changes/enhancements required to support T+2 settlement. Fund/SERV currently supports the options to settle on T+1, T+2, T+3 or greater basis today.
No action is required: NSCC will make the modifications systematically, to avoid significant client impact. WMS Mutual Fund Services will automatically update the SD to T+2 for all domestic securities that currently have a SD of T+3, effective upon the industry move to T+2 on September 5, 2017.
Fund clients that do not want NSCC to modify the SDs on their domestic securities from T+3 to T+2 will have the opportunity to contact WMS Mutual Fund Services prior to the effective date of the change and indicate the securities that should be excluded.
Yes. WMS Mutual Fund Services will systematically update any domestic security on the Fund/SERV platform that has an "Alternate Settlement Date" of T+3 to T+2.
Yes. WMS Mutual Fund Services will provide all details to the industry via an Important Notice to be issued sufficiently in advance of the move to T+2.
Yes. Fund clients will have the option to change the settlement date back to T+3, through the existing update process, which requires submitting a Fund/SERV Security Issue ID Modify Form to WMS Mutual Fund Services.
Yes. Fund/SERV in the existing client test region (PSE U) supports various settlement dates today.
DTCC does not have the list of specific CUSIPs to be used for industry testing at this time. DTCC plans to finalize and publish the list in Q4 2016.
In the interim, DTCC's T+2 Detailed Testing Framework whitepaper specifies the types securities that will be used for testing, e.g. CNS-eligible CUSIPs undergoing a corporate action.
DTCC does not expect its T+2 functional changes to have any impact on system performance and also does not expect firms to significantly increase their trading volumes as result of the move to T+2. As such, DTCC is not planning to conduct or require any industry performance testing.
Currently, the industry is planning a "big bang" implementation of T+2 on September 5, 2017, during which all industry participants will convert to T+2 at the same time.
DTCC is establishing two separate test environments to enable Members to test in both a T+2 and T+3 environment at the same time. DTCC's existing PSE U environment will contain the T+2 changes for industry testing that will be launched into Production on September 5, 2017.
Currently, the PSE U environment runs on a T+3 basis. DTCC will convert the T+2-impacted applications in PSE U to T+2 in Q1 of 2017.
DTCC decided to make the existing PSE U environment the T+2 environment because most, if not all, of DTCC's Member firms are already connected to it.
DTCC's new test environment (PSE A) will contain T+3 functionality.
Several documents on under the “Industry Documentation” portion of UST2.com discuss T+2 industry testing efforts.
In particular, DTCC has published two whitepapers pertaining to T+2 Industry Testing:
In addition, these documents are useful to gain an understanding of the T+2 functionality that will be tested:
The Transaction Management Tool is an application DTCC developed to aid Members in testing, by providing a way for them to generate T+2 test transactions and upload them into the test environment. The tool supports both manual and automated processes.
There is a description of the Transaction Management Tool in DTCC's T+2 Test Approach: Detailed Testing Framework whitepaper.
Securities lending market participants have indicated that they expect to shorten the securities lending recall period to align with the shorter transaction settlement cycle post-September 5, 2017.
Parties to a securities lending transaction generally agree to a recall period through the use of a form of the Master Securities Lending Agreement (MSLA) published by SIFMA. In the SIFMA provided model MSLA, section 6.1(a) references the securities lending recall period aligning with the underlying transaction settlement cycle, but also refers a trade date plus three settlement cycle. As such, SIFMA has developed the below targeted amendment to the model MSLA section 6.1(a) to remove the reference to a specific timing for the settlement cycle, and clarify that the recall period tracks the transaction settlement cycle of the loaned security:
6. Termination of the Loan
Unless otherwise agreed, either party may terminate a Loan on a termination date established by notice given to the other party prior to the Close of Business on a Business Day. Unless the Borrower and Lender agree to the contrary,
Tthe termination date established by a termination notice shall be a date no earlier than the standard settlement date that would apply to a purchase or sale of the Loaned Securities in the principal market of such Loaned Securities (in the case of a notice given by Lender) or the non- cash Collateral securing the Loan in the principal market of such non-cash Collateral (in the case of a notice given by Borrower) entered into at the time of such notice, which date shall, unless Borrower and Lender agree to the contrary, be (i) in the case of Government Securities, the next Business Day following such notice and (ii) in the case of all other Securities, the third Business Day following such notice.
A Microsoft Word document designed to assist with this targeted amendment is available at the following link: 2017 Amendment to 2000 Master Securities Lending Agreement.
As firms often customize MSLA agreements with securities lending counterparties, including provisions regarding the termination of loans, firms should analyze their MSLAs with counterparties to determine whether existing MSLAs require amendment.
The T+2 Industry Requirements document, published in June 2015, is a good starting point to understand the impact of T+2 on various industry stakeholders/constituents.
The "Industry Documentation" section of UST2.com is also an excellent resource for information on T+2.
The US and Canadian markets both plan to implement T+2 on the same day (September 5, 2017). Therefore, it is not anticipated that the Canadian and US markets will be on different settlement cycles.
The T+2 Command Center, in conjunction with the ISC, is planning to identify and track risks that would occur if the US and Canadian markets were to be on two different settlement cycles. That work is scheduled to begin later in 2016.
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