The new settlement cycle in North America
On May 28th, 2024, the settlement cycle for standard U.S. securities transactions was reduced from two days (T+2) to a single business day (T+1).
This procedural change was already applied to Canadian and Mexican securities one day before.
The change affects stocks and bonds regulated by the DTC (Depository Trust Company), while trades on Fedwire, mainly U.S. Treasury and related Repo activity, already settled at T+1.
The decision was prompted by high market volatility in 2020 during the first wave of the Covid-19 pandemic. It convinced the main operators in the United States to propose to the Securities and Exchange Commission (SEC) in December 2021 a reduction of the settlement period to mitigate counterparty risk. The SEC accepted the proposal on February 15th, 2023 and established May 28th, 2024 as the conformity date for the introduction of the new settlement cycle in the United States.
WHAT WERE THE USA’S OBJECTIVES
Shortening the settlement cycle is aimed at mitigating counterparty risk. Consequently, the efficiency of internal processes must be improved by standardizing the various trade confirmation stages as summarized below:
- Allocation: the client provides the allocation details to the US broker-dealer
- Confirmation: the US broker-dealer sends a trade confirmation to the parties
- Affirmation: it is a stage that becomes mandatory for US Brokers to complete the settlement process for institutional clients
THE SECURITIES SETTLEMENT CYCLE IN EUROPE
In Europe, the shortening of the settlement cycle is still under review: the European Commission has mandated the ESMA (European Securities and Market Authority) to produce a detailed report highlighting costs, benefits, methods, and impacts of the hypothetical new settlement cycle by January 2025.
This implies that 2026 is the earliest these new procedures could be introduced to the main European markets. However, anticipating the launch is desirable to close the competitive gap with North American markets.
In Europe, Corporate Events related to multi-listed securities (listed simultaneously on North American and European markets) will be affected in the immediate future. Individual European Exchanges have in fact already made different choices related to the dividend attribution date, with an impact on trading activities.
HOW INTESA SANPAOLO COPED WITH THE NEW SETTLEMENT CYCLE
Through IMI Corporate & Investment Banking Division’s units dealing with trading and post trading services, Intesa Sanpaolo has adopted the processes and initiated all necessary actions to ensure compliance with the new settlement times. Two operational models of affirmation are proposed to our clients. In both models, the US Sub-Custodian will complete the affirmation process on behalf of the bank for transactions subject to regulatory obligations.
The integrated solution of Market Hub Execution & Settlement ensures compliance with the new regulatory requirements by the cut-off dates. Also, Intesa Sanpaolo IMI Securities Corp., the Group’s broker/dealer based in the USA, has consolidated the confirmation/affirmation processes to meet the new rules related to trades executed with US brokers, in support of its customers.