The following podcast was originally posted by Clear Street on March 20, 2024.

In a recent episode of the Clear Street podcast, Word on the (Clear) Street, SIFMA’s Tom Price, Managing Director, Technology, Operations, and Business Continuity, sat down with John Oleon, Managing Director, Clearing & Settlement Operations at Clear Street, and Clear Street’s Chief Operating Officer, Andy Volz, for a conversation on the impact of a shortened settlement cycle. Two months out from T+1, this episode covers best practices, collaboration with vendors and counterparties, international implications, regulatory considerations, and more.

Transcript

Edited for clarity

Andy Volz: Welcome back. This is word on the Clear Street. I’m your host, Andy Volz, COO of Clear Street. Joining me today is John Almiron, managing director, clearing and settlement operations at Clear Street. And we have a special guest from outside Clear Street. Tom Price, managing director, technology operations and business continuity at SIFMA. John is Clear Street’s resident T+1 expert and Tom wrote the playbook on T+1 and has overseen several industry wide transfers, including the original shift from T+3 to T+2.

Andy Volz: Tom, why don’t you tell us a bit more about yourself?

Tom Price: Well, thank you, Andy. And I want to thank you, John in Clear Street, for the opportunity to have this discussion today. I’m a 40-year Wall Street veteran. I started in the business when the Dow Jones Industrial Average was 900 and stocks were trading in fractions. I represent SIFMA, which is 100+ year old trade association representing the broker dealers, asset managers, banks and other parts of the financial services ecosystem.

Our primary goal is to advocate in Washington DC, in state capitals on pending legislation and regulatory matters impacting the financial markets, our members and investors. In addition to our New York and Washington offices, we have sister organizations in London and Hong Kong, and I’ve been at the SIFMA for close to 25 years. As you stated upfront, Andy, I’m currently the ops tech cyber and BCP team leader. SIFMA has been a key leader working with ICI, DTCC and Deloitte. When we completed a multi-year project following the European markets transition to T+2 back in 2017. And today I’m co-chair of the Industry Steering Committee to transition the industry to T+1 and lead the effort working with our partners in getting there by May 28th of this year. Again, thank you for inviting me and I look forward to this discussion today.

Andy Volz: Thanks, Tom. Thanks for kicking it off for us. And John, you and I have both been here about three years. Why don’t you go ahead and give us your background as well?

John Oleon: Sure. I’ve been in the business for about 38 years. I’ve worked at a variety of firms from long stints at Fidelity, where I led their international product and back office, hilltop where I ran operations and client onboarding and those type of things, and then a variety of roles across the business doing system installs middle and back-office operations, having worked pretty broadly.

I actually came here to Clear Street because it’s such an intriguing story, if you ask me, and this really kind of dovetails into T+1 in that building your own back office system and the technology that we are rolling out across the firm really plays well with the T+1 initiative that the SEC has put upon us.

Our technology is cutting edge. It allows us to quickly pivot to something like T+1 and really service our clients in a way that is much less impactful than in places that have long batch times and technology that’s a little bit more age than what we have. And that’s really the reason I came here. I knew many folks here that were telling an exciting story and I latched on to that. And then when the opportunity came up, I came on board. And as you all know, Andy, we’re doing some special things here with the technology we have and and servicing our clients. So this is a going to be an exciting conversation we’re having today. Great.

Andy Volz: Yeah. Thanks, John. I agree. Tom, we’ll start with you. I think we’re about three months away from the go live of T+1. We assume that the industry is fully prepared on that shortish timeframe. What are you seeing? What are the gaps? What are the concerns?

Tom Price: Good question, Andy. We’ve been at this for quite some time, as you know. So we are very close to the membership. We’ve been doing a number of surveys. We started late summer into the fall and recently completed our winter survey here. And the results are mainly that the firms are saying that they’re ready, that they don’t foresee any major issues.

The real thing is we’re ready. But what about some of our other counterparties in the system? And that’s really what folks are focused on, mainly small asset managers, perhaps small broker dealers, small vendors that support the infrastructure. So there is some concern around smaller participants ready to make the transition on May 28th. But overall, we don’t foresee any showstoppers here.

One of the big focuses, in addition to some of the smaller participants, is the international marketplace and investors in Europe being able to meet the compressed timeline. So that’s a big focus. And I think the big takeaway to all of this is communication. It’s critically important, these types of events, to continue to communicate that we’re moving into a T+1 world, we don’t expect a delay. It’s a regulatory mandate and folks are required to meet these timelines. Just recently, DTCC put out there March 2024 T+1 conversion guide, and I think that’s a resource that folks should be looking at as they prepare this on this journey, as well as SIFMA standing up its command center, which will be operational for the transition weekend going into Memorial Day. No showstoppers Andy, that’s where we are.

Andy Volz: No showstoppers. That’s good to hear. John, maybe your perspective as well.

John Oleon: Yeah, and I agree a lot with what Tom said. I do believe that most of the broker dealer community is going to be ready for this. And I think they focused much more on this than probably some of the other initiatives we’ve had in the past where we’ve seen delays. This has been taken very seriously across the industry.There’s been a lot of industry calls and I think everybody for the most part is ready. Will there be things that come up post that date? Of course. I think we all suffer from only knowing the things we know, but the community as a whole tends to rally around those problems and fix them rather quickly. And we’ll also be looking for guidance from the regulators and SIFMA and others should we run into those roadblocks.

I do think some of what Tom brought up and to add on to that is I think the further you get away from the US, the more impactful this comes for firms. So those in Europe are going to have to stay late to do their allocations, make sure that everything gets down to their custodian bank, their custodian bank than needs to take that and process all that information same day, likely before ten, 10 -10:30 at night.

And today, I think often what happens is where there’s a missing allocation or trade affirmation that can happen the next day in order for T+2. So that timeframe is so compressed now that we’re going to see a lot of people have to focus more on that and perhaps hiring and then obviously looking for solutions and their back office. And then when you go further out to the Far East, I think that becomes more of an early morning problem for them. Whether they have traders overnight trading in the U.S., someone’s going to have to come in early in order to kind of attack those things. I think from the U.S. side, those firms that still have a lot of legacy technology, should there be issues, pricing files being delayed, all the things that the industry has gone through over the years, regardless of T+1 because of the compressed time frame now, it leaves for a little area in those firms that have long batch times or they just don’t have the staffing at night to handle these situations. And then finally, client behavior I think needs to change, right? We often tell clients, well, if you can’t get it today, bring it to us tomorrow. I think they need to focus a lot more on the full trade date and getting everything allocated, affirmed and done because once your night cycle starts somewhere around 11:30 or 12:00 at night, literally all the trades from that day are settling and you’re really on to the next day and now there’ll be an opportunity to do stuff the next day but that really falls out of both the night cycle and some of the risk monitoring and things we have. So, the preference would be that everybody kind of gets everything done day one.

Andy Volz: So other markets have transitioned to T+1 in the past. What can we learn from markets like India that have gone through this process already?

John Oleon: Yeah, I think the U.S. being much larger and less institutional than some of those markets you’re discussing. So, Turkey is have been that way for years, Taiwan and India just did it. I think makes it a little bit more impactful for the U.S., obviously, market size is much bigger here, but even the types of investor and trade here makes it much more complicated.

We have a much bigger security finance business here in the States and other type of mechanisms for funding trading that will make it much more impactful. I don’t know that we can learn a lot from those other than what they’re seeing in those markets are actually higher settlement efficiency than they did for T+2. Hopefully what happens here is that we’ll probably have a small blip in the beginning where people will have to learn and change. But I do think we should see then higher affirmation rates for same day and hopefully less sales and higher settlement percentages.

Andy Volz: Tom, any thoughts there?

Tom Price: Yeah, just real quick, Andy, there’s a lot of discussion, a lot prior to the transition, and I think in retrospect there were really were no obstacles that were insurmountable in that transition. Folks got there, There were timing issues, there were buy side concerns. But now, not only as the Indian market transitioned to T+1, but they’re also talking about going to T+0 framework. So I think there’s more to come on this. But I think the big issue is that the U.S. market is, as John has suggested, a lot more complex, a lot larger, and although they led the way, if you will, were close behind.

Andy Volz: Got it. Thank you. So, John, specific to Clear Street, what have we had to do to prepare for T+1 and how are we helping our clients prepare for this process?

John Oleon: We did a pretty deep dive across all of our systems just to make sure that they could handle T+1. We have done T+1 trades today. We’re obviously in the Treasury market and we do that consistently. We do options which are T+1 today. So, our system, we knew, could handle it, but what we wanted to ensure was that every piece of it from back to front kind of can handle that and that was a success. We did that in short order. We made a list of a few tables and things that we might need to adjust that day, and then we joined industry testing, there’s been extensive testing with DTC and counterparties, and we’ve completed that late last year and then we took a turn and we started to look at our client business and our affirmation rates.

And we’ve reached out to some clients as to why they may not be affirming trades same day or early next day. And many of them said that they were either working on it or they improved that rate dramatically. I think SIFMA and DTC have done some reviews and seen that people are focused on affirmation rates and making sure that trade matching has improved. So, I think this was a really good exercise across the board. And now what we’re doing is just making sure that we’re communicating, we’re still attending events to make sure that everybody is up to speed in the industry and with our clients and continuing that dialog where people may be struggling or want an answer to something.

In fact, this morning I received a note saying, Is this going to be delayed in any way? Is that something that we think is going to move down the line and we do not think that this will be delayed in any way? We feel that the is pretty solid on this and that’s a good weekend to do it. And we have partners in Canada that are going to move with us. So, it would be a difficult thing to change. I currently, from what I’m hearing, do not see any blocks out there to move to T+1 at this time.

Andy Volz: Tom So back five years ago or so in 2017, you co-chaired the industry initiative to go from T+3 to T+2. What do you think the big differences are going T+2 to T+1 from T+3 to T+2?

Tom Price: That’s a good question. Andy, I think the big issue is that we followed Europe when we went from T+3 to T+2, so there was a lot to learn lessons learned from the European market transition. So, this is a bit different because we’re leading the way here. The biggest issue and biggest consideration is that the time compression, as John has suggested, I think that’s the big issue that folks have to really be cognizant of. What are the products, what are the timing issues, what are the customer issues in terms of the allocation information, etc..

Also, as John highlighted, Mexico and Canada will be moving to T+1 the day before. They’ll be moving on May 27th, whereas in 2017 the U.S. aligned with those markets around the Labor Day transition in 2017. As I suggested, the timing issues are compounded by investors and market participants in different time zones, specifically the APAC time zone, they’ll have challenges to meet settlements and a compressed timeline and the necessity to convert that affects transactions to go from the local currency to U.S. dollars. So there’s been a lot of discussion around currency conversions. Second, the new requirements by the SEC obligations to allocate, confirm and affirm on trade date. That’s not discretionary. That’s a requirement on the 15c62.This will be exceedingly challenging for foreign investors. However, not impossible. And a lot of thinking has gone into meeting those requirements through staffing, leveraging technology and other process improvements.

I think one of the key things that we’ve uncovered is ETFs and the unique product considerations as it relates to some components that still may be settling too. So, there’s a bit of a mismatch and there are capital considerations for that. DTCC has worked on a number of programs around chew up and most of that information is listed on the U.S. T+1 website. Another key issue folks need to focus on is securities lending shorter recall cut off times so, folks will really need to study that that those kind of recall times or at 11:59 p.m. on trade date and with on corporate actions the record date is now going to be the ex-date. So folks really need to understand and the corporate actions world, what does that mean and what the implications there. And then finally, and I think the big issue here is how do you repair all these breaks in a compressed timeline? And folks really need to understand how are they going to leverage technology, leverage the teams in order to and to make sure that they’re repairing breaks at the source as opposed to downstream.

Andy Volz: Yeah, there’s certainly a lot to think about there. And John, going over to you, you always see front and center on the operations team when this transition happens. What are your thoughts?

John Oleon: To Tom’s last point, we as a system have real time trade matching reconciliations. We’re consistently throughout the day making sure that our breaks it down and that what we see counterparty issues, we reach out intraday. That’s something that we do today in a T+2 environment, and rarely do we go home with breaks versus either the street or our customers. We try to get everything done same day so that the next day kind of starting new and it really plays well into a T+1 environment. Our system allows us for that real time data and that real time matching. So I think that puts us in a good position. We do have some counterparties that continue today to say, Yes, I know that break unfortunately, I went out to a different broker. I will come in to you in the morning when my batch runs because that’s when it can resend it. Those types of behaviors have to be fixed down the line. So, I think that that is really impactful for the industry and I know from speaking to a couple of my counterparts, that’s what they’re looking at. They’re looking to make their systems more real time. Even at the core of the system is still old mainframe and batch oriented.

So that’s one impact, I think. I think across the board this has spurred investment in back in middle offices that we’re already doing here. A clear street. Many firms have obviously invested in their front-end technology, things that their clients want but I think that this 18 month, or however long it’s been, process to get here has caused firms to relook at what they’re doing and build technology for the back office to reduce that risk so that we don’t have a problem going into T+1.

And then, you know, the last part is, I think, as I mentioned before, with it being further away from the U.S. like Europe and the Far East, I think there is some significant funding that’s going to impact those places as well. As not only do they have to invest, but they have shorter timeframes to unwind. Let’s say they are euro based firm and they need dollars. That now becomes something they need to do a day earlier on the funding side. So, their custodian banks have to step up to that earlier funding and I also think perhaps some of the funding markets might have to step up. People may need dollars earlier, and that may kickstart either the repo market or the borrowing market for those types of currencies.

Andy Volz: And Tom, coming over to you. What’s the real driving force behind T+1? Is it just the progression of the markets, the modernization of the markets? What are your thoughts on sort of the seemingly ever kind of shortening settlement cycle in the markets?

Tom Price: Yeah, well, no doubt the move to T+1 is forcing modernization and that is a forcing mechanism, no doubt. And it’s the commission’s goal to create straight through processing same day affirmation. And you really can’t achieve that unless you’re leveraging technology and eliminating manual processing. The real driver here is risk reduction in the system. The real key is that nothing good happens between trade date and settlement date. So really the goal is to lessen the time between trade date and settlement date, to mitigate risk in the system. And correspondingly, there’s a big investment that folks have in terms of capital on the clearing fund that the DTC. So by reduction of the risk in the system, you actually create some capital efficiencies as well. So the big push is better markets and the post trade system creates better efficiencies in terms of same day affirmation and allocations and then really to leverage technology in a way and take a lot of this manual processing out of the system.

We have the deepest, most liquid markets in the world in terms of trading, and we need to continue to improve our post-trade processing. The volumes continue to increase, and we have to make sure that our processing as it relates to post-trade and clearance and settling also is able to accommodate the increase in volume. So I think this adds to our competitive advantage in terms of modernizing our post trade system.

Andy Volz: So quickly following T+1, many people are already thinking about T+0. What will that look like? Well, what can we expect? Tom, we’ll start with your thoughts.

Tom Price: Yeah, just real quick on this, Andy. This has been a perpetual question that continues to come up. It’s even interesting because we hear folks from Europe as they’re on the journey to get to T+1 and the complication, how complicated that issue is that some folks are talking about T+0. So, these are complicated and complex systems, as you all know, and we’re part of a critical ecosystem of the capital markets which needs to function effectively. So, there’s a lot of conversations around this, but as we went through the journey of T+2 to T+1, things like securities lending, FX, ETFs, the benefits of netting, the time zone issues, real time affirmations, all of this gets a magnitude of higher degree of complexity. And at this point, this is not something that SIFMA supports.

I know there’s been a lot of discussion about literally leveraging blockchain, but I don’t think anyone is ready to rip and replace the current infrastructure that we have in the system. And this could be the point where we have maximum efficiencies in terms of equilibrium, where the benefits of continuing to press to a shorter settlement cycle actually moves beyond the point of the benefit and creates risk in the system. So there’s a lot of thinking around this, and I’ll leave you with this going to T+1 is evolutionary going to T+0 would be revolutionary and I don’t think the markets are ready for that right now.

Andy Volz: John, what do you think?

John Oleon: Yeah, I definitely believe in those thoughts as well. You would need front to back total rebuild of technology for all participants. Not just buy side, not just sell side, custodians, clearing agencies, and the like. Australia looked at this a number of years ago. They did small components of it within their market, but they were never really able to totally revolutionize the whole market so that it was front to back kind of same technology, blockchain or the like. So I think doing it in a market like the U.S. is going to be quite a large build and really take a large investment from the community, which I just at this point I don’t see that being there. The only thing I’ll say is we don’t know what future technologies are coming out and maybe that’s the solution and maybe that’s the time to wait for that.

Andy Volz: Just changing topics a little bit. We’ll start with Tom. What you see is the regulatory implications of T+1? We’ve talked a lot about the business implications.

Tom Price: Yeah, well, it’s foundational to understand the new requirements under Reg SEC rule 15c61 15c62to the commission is requiring under 15c62, which is a new rule for broker dealers to develop policies and procedures to monitor, ensure same day affirmation, or to have broker dealers and written agreements between themselves and the customers to ensure same day affirmation, so I think that’s fundamental to this whole transition.

In addition, the Commission under Rule 2042 requires investment managers to keep records and timestamp their allocations and affirmations on trade date. I suspect there’ll be a lot of interest by the regulatory community as to how firms are complying with these new requirements. So it is an optional nor do we expect the SEC to delay compliance and I think John touched on that earlier as it relates to a May 28th effective date.

SIFMA has been working with DTCC, ICI and Deloitte to develop an assessment document and Playbook, and we published them on our website. And I think a couple of key things to understand as folks are continuing this journey and recognize we’re really in the last mile here, but you need to really understand your current processes and workflows.

It’s important to collaborate with your counterparties. Communication sessions like this are critically important for the industry to be part of, collaboration with The Avengers and your third party providers, I think is critically important. Understanding the new cut off times, industry best practices for allocations is 7 p.m. and affirmations is 9 p.m. and those are not arbitrary, those timing is set in order to meet the 9:30 p.m. EST. and as they see night processing. I think it’s important that market participants leverage the different tools out there. The days of submitting allocations and affirmations on a spreadsheet, I think that should be in the rearview mirror. I think folks really need to take a look and understand the cause, the root causes of the breaks and to resolve them and then the FX consideration. So my advice really for this group is don’t wait till May 28 to start allocating and affirming trades, build that into your routine on a daily basis. And that should happen probably today.

Andy Volz: John, anything to add?

John Oleon: Yeah, I think things like Reg show the recall process by extension, sell out all the regulations that we live on today are nowadays shorter and they give us less time to react. Perhaps, I think there will be a period after we settle in, that we may have to review some of those in order to make sure that they still fit with the change on T+1.

So typically what the industry does is we suck it up and we get there and process and we try to get everything we can done for our clients. But then we tend to go back and take a look and say, this is a little unwieldy at this point, and perhaps we can petition the regulators for some relief, a little change in time frames, things like that Do I know that maybe ratio show moves to the end of day on T+1 is an example? I don’t know, but that’s just an example of something that we need to take a look at down the line and make sure that it still fits in a T+1 environment.

Andy Volz: Got it. Thanks, John. Okay. I think we’ve covered a lot, so I’m going to have one more question. We’ll start with John. So, John, what do you expect to see the day after the transition to T+1?

John Oleon: Yeah, I so I think there is a transition period no matter what happens when new regulations come out. I do expect things to be somewhat business as usual in the U.S. We have a double day of settlement that first day. Hopefully, things go well. I don’t think this is kind of a Y2K situation where we’re not sure the systems are going to work. What I think we’re going to have is probably a small increase in fails. A lot of people saying this doesn’t work like it worked before and maybe a few more margin calls for clients or things like that based on time being shorter. But, I think we’ll quickly pivot. I think we’ll figure out what’s going on. And then, like I said earlier, we will need to reassess and take a look at things that we need to focus on.

We may decide to take a quick project to solve for improving operations as an example, or do it tweak to a 204 Reg show report. Those are things that need to be quickly pivoted on. And then lastly, I’ll say we as an industry need to make sure we’re communicating and not if one person has a problem. Well, that’s not my problem because it could easily become yours in short order. So, whatever is being kind of communicated around needs to go broadly so that we’re all looking at the same thing and looking for solutions.

Andy Volz: And Tom, I imagine SIFMA will be helping with that communication. But what else will SIFMA be focused on immediately after implementation?

Tom Price: Well, we’ll certainly stand up a command center, John, as I said earlier, during transition weekend. So, there’s no Memorial Day weekend for my team. There will be no time at the beach, I can assure you of that. We’ll have a line set up. We’ll have market participants will be available to use that resource. We’ll be working with the DTCC to kind of triage any items as we transition through this weekend.

But I think the big issue, Andy, is looking past transition weekend, as John had indicated, are there fails in the system? What are the root causes of those fails? How do we address those fails? And I think folks will have an opportunity the members will have an opportunity to kind of do a post analysis and then really start to look aggressively at how do I now adopt the technology to kind of streamline these processes, again, identify where some of the weaknesses are, and then look to leverage technology in a way to continue to automate the back post-trade processing in order to meet these new timelines. So, I think that’s going to happen in a pretty expedited fashion post this transition weekend.

Andy Volz: Great. Well, Tom, thank you, John, thank you. It’s awesome to hear from both of you and your deep knowledge on this topic. I think that’s about all we have time for today. Thank you, everyone, for listening and we’ll catch you next time on Word on the Clear Street available where you get your podcasts.

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Tom Price is Managing Director Technology, Operations, and Business at SIFMA.

Related Resources

• Featured Issue

  Shortening the Settlement Cycle

• Resource

  T+1 Industry Implementation Playbook

• T+1 SIFMA Training Video

  A Journey to an Accelerated Settlement Cycle