What's Next for Depositaries Following the T+1 Implementation

New rules to be implemented by the US Securities and Exchange Commission on 28 May have shortened the standard settlement cycle for most broker-dealer transactions from T+2 to T+1. Brendan Toolan (MUFG Investor Services) looks ahead to some of the anticipated post-implementation challenges and considerations.

New rules to be implemented by the US Securities and Exchange Commission on 28 May have shortened the standard settlement cycle for most broker-dealer transactions from T+2 to T+1.

The intent of the new rules, which reflect a dramatic change in the post-trade environment, is to reduce the credit, market, and liquidity risks for market participants. Irish funds service providers monitoring this shift are now focusing intently on fund strategies with exposure to US securities, including equities, corporate bonds, asset-backed securities, municipal bonds, mutual funds, and money-market instruments.

Once T+1 has been successfully implemented, the funds industry will face some significant challenges going forward.

It’s likely that we’ll see an increase in "failed trades," and that those transactions will be closely monitored by depositaries. If any related charges and compensation claims are levied against underlying funds, managers will need to present a case to the Fund Board for a claim, unless there is clear language about settlement risk disclosure in the fund prospectus.

Funding gaps may materialise as a headache for Irish funds that are operating in a longer subscription settlement cycle than T+1. This may result in the fund breaching Investment & Borrowing restrictions and trigger reporting obligations to the Central Bank of Ireland. The depositary must determine if the breach is advertent or inadvertent, and a decision by the depositary may be challenged by the fund management company.

More broadly, any Irish fund that is party to an FX netting or a stock borrowing and stock lending service also will need resilient processing due to the settlement timeframe restriction, and this should be described clearly in revised service level agreements. Again, any breaches or compensation claims will be assessed independently of the manager and are likely to be challenged by the depositary based on the event.

These are some of the anticipated issues post implementation. Inevitably, there will be others as the Operations community endeavours to regain pre-implementation settlement efficiency levels.