T+1 Risk Alert Highlights Examination Focus
The U.S. financial market’s move to a T+1 settlement cycle has taken tremendous resources from industry participants including buy-side and sell-side participants, custodians, and clearing agencies. Not to be left out, regulatory authorities have finalized rule changes governing settlement activities to enforce the T+1 settlement cycle.
The SEC Division of Examinations published a Risk Alert on March 27, 2024 to emphasize preparedness for the shortened settlement cycle, and to highlight information regarding the scope and content of their examinations and outreach.
T+1 Operational Readiness
The SEC will assess whether registrants have effectively adapted their operations, including changes to systems, controls, policies, and processes, to accommodate the shortened settlement cycle. Firms must evaluate the implementation of new technologies, modifications to existing systems, and any testing conducted with entities such as the Depository Trust & Clearing Corporation (DTCC), brokers, and other relevant parties.
Compliance with T+1 Regulatory Requirements
The focus will be on ensuring that registrants comply with the newly implemented or amended rules, particularly:
- Rule 15c6-1, which governs the standard settlement cycle and requires T+1 settlement unless expressly agreed to at the time of the transaction.
- Rule 15c6-2, requiring broker-dealers to ensure that allocations, confirmations, and affirmations (ACA) are completed by the end of the trade date.
- Rule 17Ad-27, which mandates clearing agencies to facilitate straight-through processing.
RIA Recordkeeping and Reporting Requirements
Examinations will review compliance with new recordkeeping requirements that demand precise documentation of transaction confirmations, allocations, and affirmations with appropriate timestamps.
Disclosure Practices
The Division of Exams will evaluate disclosures, representations, and communications to customers and clients regarding changes due to the shortened settlement cycle.
T+1 Preparation and Impact Assessment
The SEC will review the steps taken by registrants to prepare for the shortened settlement cycle, including their operational, business activity, risk assessment, and client service adaptations. This includes how firms manage clearance and settlement activities, custodial services, securities lending, and the overall impact of these changes on their clients and services.
The move to T+1 is intended to reduce settlement risk and emphasize continued focus on operational and technology enhancements to promote straight through processing. To date, it has taken a large commitment of resources and coordination on all participants. The SEC’s Risk Alert is a healthy reminder it is a regulatory requirement and will remain a focus during examinations.
The Operations Partner You Need
Oyster Consulting is actively engaged with key service providers in the industry, including the Fintech community, technology platforms and clearing brokers. Our experts provide can review your clearing and operating contracts, assist with your operational and technology roadmap, amend policies and procedures, and create or update your business continuity and disaster recovery plans. Leverage our industry perspective to minimize disruption during T+1 implementation.
