Alix Steel: Can you just explain to us why this was such a big deal and why we had to go to settle trades in just one day?
Ken Bentsen: First of all, thank you for having me on this topic in particular. This is something that the industry started looking at in the fourth quarter in 2020 and actually, you could go back as far as when we changed this settlement cycle from three days to two in 2017, people were thinking that was just a way station to get to T+1. And so I think the desire is to mitigate as much risk as we can from the system, eliminate the need to hold excess capital at DTCC, but still be able to preserve the various aspects of the securities market, things like securities lending, a prime brokerage that are important facets of the marketplace.
The only other thing I do want to add, you pointed out, you know, it’s been 100 years to get back to T+1. I was looking at something today, 100 years ago. I think the average daily volume in equities in the U.S. was something like 4 million. Today, it’s what, 11 billion? So, a lot has changed in the U.S. capital markets over the last hundred years.
Alix Steel: I think a hundred years ago we were driving it around by courier, right in some capacity, biking, and walking and so that was also a big difference. Do we know if it went well?
Ken Bentsen: Well, we’re really in the process. The industry spent the weekend, and this is a partnership between SIFMA, the Investment Company Institute, and DTCC working with the broad industry counterparts, are buy-side sell-side members along with the various utilities and service providers and so it’s an all-hands-on-deck effort that we’ve been working on for almost four years. But, in the last several months you know an ongoing weekly effort that culminated beginning at the end of last week with setting up an industry command post. It’s been running through the week and it’s running right now. It’s also been in coordination with our partners in Canada, Mexico, Argentina, Jamaica, and Peru, all of whom went to T+1 yesterday. And so they will be having their double settlement today in the U.S., which obviously is a much larger market by longshot. You know, tomorrow will be the double settlement today so securities that change or trade today will settle tomorrow whereas securities that traded on Friday will also settle tomorrow. So that’s when we’ll really when the rubber hits the road but a tremendous amount of work has been put into this and we feel very optimistic about where we are.
Romaine Bostick: Certainly. So, are you concerned at all, particularly with the double settlement tomorrow, then of course, with the MSCI rebalancing, is there any concern here about any sort of hiccups?
Ken Bentsen: You know, I think what members are reporting to us, what the various service providers are reporting in DTCC, is that all systems are go, everyone’s ready. We’ve had the experience of seeing what’s happened in these other markets, in particular Canada, which is the largest of the other markets. They seem to be handling it well right now again, I think we’re optimistic. I think we’ve taken every precaution that we can. We’ve tried to inform the broad aspect of the industry. We’re looking at the cross-border implications where they’re not shifting to one and I think we’re prepared for that.
Romaine Bostick: Well, let’s talk about the cross-border thing, because that’s a big issue. A lot of foreign investors have basically made it clear that there is still, even once you sort of get everybody on the T+1 page, you’re still going to have issues with regards to currency transfers and the idea that that’s not going to be completely in sync with the time that it takes to settle. What is the solution if there is one at all, to make sure that that’s still seamless?
Ken Bentsen: Well, I think people have pre-position for it at this point and obviously remember when the U.S. shifted from 3 to 2, we were behind much of the rest of the world, which had already gone to two. And we expect that most of the world will follow to one. The U.K. has already said that they’re going to do it by the end of 2027. We expect the EU to follow suit on that as well. Obviously in the FX world that sector has been making provisions for this and I think we’ll probably see more activity among service providers there as well.
Romaine Bostick: Ken, I have to ask you, too, and I know you guys have been preparing for this for years and we’ve talked with so many banks and they’ve made it clear they’ve all got these contingency plans in place. But some of those same banks are also saying they are concerned about the risk, at least in this transition of failed trades, not just today, but really over the next couple of weeks here. If we do end up in a situation where we see major failed trades here. Is that going to have a ripple effect or is that going to be something that’s, I guess, a little bit more contained, isolated to just that particular transaction?
Ken Bentsen: Well, you know, we’ve had periods of volatility where we’ve seen a spike and in fails. And we saw that in March of 2020 with the onset of COVID and the reaction in the U.S., we saw that during the meme stock incident in 2021, industry has been able to come together. SIFMA’s been very much involved in this of working to allow firms to work to settle out failed transactions. Is there a chance that we’ll see a spike and fail with this transition period? Sure. But again, we think that provisions have been made to address that if that occurs. But that over the long run, we think that the market is ready for the T+1 that the work has been done to to get us where where we need to be.
Alix Steel: If we do see some failed trades, do you think it will be because of, the FX issue because you have to convert into dollars? Will it be securities lending? They have to get those shares back or allocation confirmation process because some of the trades are just smaller than the bigger ones we used to see. Where do you think the biggest crack will be?
Ken Bentsen: It’s a good question. It’s hard to say. I think it’s probably going to be more one-off situations where perhaps firms are not as ready as say it’s they might be or there could be something that no one thought of, but right now we’re not seeing any of that and and I think it probably will be more, and I hope, it’ll be more of an anomaly than anything that is systematic.
