On January 17, the Office of the Comptroller of the Currency (OCC) issued a bulletin advising banks on how to prepare for the upcoming shortening in the standard securities settlement cycle for most U.S. securities transactions. This is in response to the Securities and Exchange Commission (SEC) adoption of final rules that shorten the standard settlement cycle for most broker-dealer transactions from the second business day after the trade date (T+2) to the first business day after the trade date (T+1). The SEC has approved a similar rule change by the Municipal Securities Rulemaking Board (MSRB) to the settlement cycle for municipal securities, which has shortened the regular-way settlement for municipal securities transactions to T+1. The OCC expects banks to be prepared to meet T+1 standards as of May 28, 2024.
Banks should evaluate their preparedness for the accelerated settlement cycle and employ effective change management processes for all trades related to banks’ securities activities. These include activities related to banks’ investment and trading portfolios and securities settlement and servicing provided to banks’ custody and fiduciary accounts. Banks that offer retail nondeposit investment products through a broker-dealer are also expected to assess the broker-dealer’s preparedness for the new settlement time frames.
The OCC advises banks to prepare for this industry-wide change by:
- Identifying all lines of business, products, and activities that involve securities settlement and servicing.
- Monitoring the progress of industry participants as preparation and testing are coordinated and completed.
- This includes regulatory changes that affect securities settlement, system and process changes at financial market utilities, custodians’ system and process changes, and third-party system or service provider changes.
- Identifying system, process, and technological changes and enhancements needed to facilitate a smooth transition to T+1 and establishing and following an appropriate project plan to address these changes. Factors to consider when developing a project plan include:
- Changes to investment accounting, trust accounting, or other securities processing systems.
- Changes to operational procedures for securities clearance and settlement.
- Changes to credit and counterparty credit risk management.
- Changes to funding and liquidity activities, such as foreign exchange transactions, collateral management, and funding options.
- Changes to client agreements and disclosures that reflect settlement time frames.
- Changes to client communication, trade confirmations, and account statements.
- Updates to third-party oversight, including with respect to retail nondeposit investment products offered through a broker-dealer.
- Changes to service-level agreements with third parties providing trade clearance and settlement.
- Training for employees.
- Enhanced focus on risk management practices and surveillance systems to identify and address potential increases in failed trades or processing exceptions.
- Updates to staffing for the days leading up to and immediately following implementation.
- Evaluation of current processes and workflows to improve overall efficiencies.
- Changes to market synchronization, as the U.S. settlement cycle will no longer align with many international markets.
For many banks, the OCC anticipates that the majority of the changes needed to implement T+1 will be completed by third parties — for example, industry utilities, custodians, systems and service providers, broker-dealers through which banks trade for themselves or on behalf of their fiduciary and custody accounts, and broker-dealers providing retail brokerage services to bank customers. The OCC has advised banks to consult OCC Bulletin 2023-17, “Third-Party Relationships: Interagency Guidance on Risk Management” (discussed here) for guidance on assessing and managing risks associated with third-party relationships. The OCC also referenced the T+1 Industry Playbook as an additional resource in navigating this change. For any questions about the move to the T+1 settlement cycle, please reach out to a member of your Troutman Pepper team.