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Shortened settlement (T+2) overview
• There are parallel industry initiatives in the US and Canadian markets to shorten the time frame between trade execution and
settlement from three days (T+3) to two days (T+2).
• This initiative covers all Depository Trust Company (DTC) settling products (equities, corporate bonds, municipal bonds and
unit investment trusts) and products traded on the Canadian exchanges (e.g., the Toronto Stock Exchange). It is expected to
have a significant impact on the middle- and back-office operations and technology supporting the trade life cycle.
• The Industry Steering Committee (ISC), composed of the DTCC, the Association of Global Custodians (AGC), the Association of
Institutional Investors (AII), the Investment Company Institute (ICI), the Securities Transfer Association (STA), and the
Securities Industry and Financial Markets Association (SIFMA) released a white paper in June 2015 proposing a target
migration to a T+2 settlement cycle in Q3 2017.
• The Canadian Depository for Securities (CDS) released a white paper in September 2015 calling for Canada to go live with T+2
on the same date as the US.
• Individual organizations need to make the necessary changes by Q1 2017 in order to be ready for industry-wide testing, which
is planned for Q2 2017.
• Industry-level requirements need to be understood and translated into impact for individual firms.• Organizations need to plan, build and iterate while the regulations are being drafted and published.• Adequate preparation for industry-level testing will be critical for each organization.
US settlement cycle for DTCC-settling securities
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Proposed industry implementation timeline
The ISC white paper outlines a proposed industry timeline to meet the Q3 2017 target implementation date that includes significant industry-wide testing that firms will need to prepare for and participate in.
Communication
2015
Discovery and analysis
Feb: Completed DTCC Working Group Meetings
June: ISC publication of “Shortening the Settlement Cycle: The Move to T+2” white paper
Sep: CDS publication of “CDS Move to T+2” white paper
Industry planning
Sep: SEC chairman writes letter confirming SEC support for T+2
Q1: Regulators publish proposed rule changes
Internal build
Industry testing
2016
Q1–Q2 Q3–Q4
2017
Q1–Q2 Q3Q1–Q2 Q3–Q4
Q3: Complete industry testing
• Industry-level requirements need to be understood and translated into impact for individual firms.
• Organizations need to work closely with DTCC and the Canadian Capital Markets Association (CCMA) to plan and prepare for industry-wide testing.
• Adequate preparation for industry-level testing will be critical for each organization.
Q1: Firms begin internal builds
Q4: Firms complete internal builds, including internal testing
Q4: SIFMA, CDS Clearing and Depository Services, Inc. (CDS), and DTCC Testing Industry Meetings
Dec: SIFMA publication of Implementation Playbook
Q2: Canada Novation moves from T+3 to T+1
T+2 shortened settlement cycle 4
How EY can help in the journey
EY can support organizations impacted by T+2 settlement across the multiple phases of the journey plan, leveraging tools, accelerators, leading practices and experienced practitioners.
T+2 shortened settlement cycle 5
Illustrative impact heat map
Securities operations and technology functions will be impacted by the move to T+2 in varying degrees. The following are examples of key changes that may be required across functions:
Trade support
Syndicate operations
Trade captureTrader
reconciliations
Streetside reconciliation
Middle office
AllocationsAffirmations/confirmations
Trade affirmations
Settlement
Clearing Settlement
Physical securities
Fails management
Securities lending
Mark-to-market
Inventory management Billing
Recalls andbuy-ins
Funding and treasury
Firm funding and financing
Cash management
Projections from financing
Tax/regulatory reporting
Tax reporting
Operational management
reporting
Financial reporting
Trade and position
reporting
Client onboarding
Document management
Anti-money laundering
(AML)/know your customer (KYC)
Account opening
Settlement instruction
management
Asset servicing
Announcement creation
Entitlement capture Payments
Election/instruction
Collateral management
Agreements documentation
Segregation
Margin calculation
Margin calls
Enterprise functions
Position keeping
Books and records
Reference data
► Updates to security reference data to reflect settlement calendar correctly
► Updates to stock record and accounting systems to reflect change in settlement date
► Thorough end-to-end testing of all reference data will be required to make sure all updates are captured correctly
► Update triggers and aging logic to enable accurate reporting for management of settlement risk
► Counterparty credit exposure reports may need to be updated and tested to enable accuracy within the shortened settlement cycle
► Potential change in projection process to incorporate activities completed on TD
► Updates to systems used to generate projections in order to produce earlier estimates
► FX deadlines for cross-border activity
► Leverage electronic fund transfers vs. physical checks
► Updates to systems supporting the margin calculation and processing of margin calls
► Increased resources may be required to handle the documentation changes to support the move to T+2
► Negotiate service-level arrangements with counterparties regarding the timeline for providing settlement instructions for new or existing accounts
► Update the notification triggers for new subaccounts received over Oasys or other automated allocation platforms to reduce lag time
► Improve coordination with upstream teams prior to key event dates to reduce risk of unintended elections
► Update corporate action and dividend processing systems for ex-dates and cover/protect expiration dates
► Proactive matching and inventory management to reduce/manage fails and enable compliance with the US Securities and Exchange Commission’s Rule 204 (SEC 204)
► Increase focus on processing of dual listed securities, American depository receipts, exchange-traded funds, “when issued,” and 144a/Reg S products
► Negotiate arrangements with counterparties for providing allocations on Trade Date (TD)
► Enable TD matching and affirmation and maximize affirmation/settlement rates
► Frequent communication with clients
► Update the notification triggers and modify controls to identify and escalate aged breaks earlier in settlement cycle
► Potential for system process changes depending on existing automation (e.g., batch timing and break aging logic)
► Expedite recall process to take place on TD in order to minimize settlement risk
► Revise and test billing calculations to maintain accuracy within the shortened settlement cycle
► Eliminate manual activities impeding efficient inventory management
Impact key: High impact
Medium impact
Lowimpact
Prospectus fulfillment
Foreign exchange (FX)
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Key considerations
When implementing an accelerated settlement cycle, firms should consider several factors across the program life cycle. Each step should take into account impacts to people, process and technology, as well as the capacity to manage a complex change initiative.
• All relevant stakeholders identified with clear ownership, responsibility and engagement
• Lessons from European changes are understood and applied effectively
• Alignment with industry, including clients, counterparties, vendors and utilities
• Systematic identification of all key in-scope systems, processes and reference data that will be impacted by accelerated settlement
• Analysis and prioritization of risk areas that hinder acceleration of settlement across technology (e.g., batch updates), processes (e.g., manual processes to conduct reconciliations) and external parties (e.g., clients with highest risk of non-compliance)
• In-flight and planned strategic and tactical changes incorporated as part of the overall plan
• Need to consider implications on both process and technology change while developing business requirements
• Balance the opportunity to enhance operational efficiency across the trade life cycle with the need to make expeditious changes to comply with accelerated settlement
• Testing strategy decisions (e.g., dedicated T+2 environments vs. use of existing environments) on how the changes will be implemented and need to be finalized early
• Prioritization and sequencing of testing based on risks and complexity to minimize regression-testing impacts
• End-to-end testing to cover from pre-execution to settlement, including all corporate actions
• Management decisions are required on the extent and degree of industry testing (e.g., trading venues for participation, criteria for certification of readiness, specific areas where industry testing may be omitted vs required).
• Banks are required to sign-off or certify readiness for T+2 post-testing.
• Environments would need to be set up and synchronized with copy of production data.
• Contingency planning must be developed for the migration weekend to make sure technology platforms are up and running and support is on hand.
• Management of the double-settlement date will be critical for a smooth transition
Program management
Readiness assessment
Testing
Go-live/post-implementation
Key considerations
Design and development
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Why EY?
EY is highly qualified to assist sell-side firms, buy-side firms and custodians with the T+2 shortened settlement cycle initiative, bringing a dedicated Capital Markets practice, a deep pool of advisors with extensive operations experience, a strong record of working on industry initiatives, and world-class program management accelerators and tools.
• EY has a dedicated Capital Markets practice with a deep pool of over 500 advisors across the globe.
• We are currently assisting over 15 global systemically important banks (G-SIBS) with a range of operations and technology initiatives related to the trade life cycle.
• EY has a depth of advisory experience in process, technology and operational risk management allows our clients to optimize their operating capabilities.
Accelerate results by leveraging EY understanding of securities operations and sharing industry leading practices
• EY has a deep pool of knowledgeable advisors with decades of industry experience leading front-, middle- and back-office trade processing operations.
• We have respected technologists with proven architecture, infrastructure, integration and data management skills.
• EY has deep experience in securities operations processing, including client onboarding, trade support, settlements and asset servicing. EY has leveraged these capabilities to help clients identify areas of improvement and implement large-scale global transformational initiatives.
Leverage a deep bench of subject-matter resources tosupport seamless execution of all phases of the initiative
• EY has extensive experience running complex global program management offices (PMO). These programs touched on all components of the trade life cycle and leveraged world-class accelerators and tools.
• EY has served as a key partner to global trading firms in developing operations and technology strategies, including large-scale transformations with industry organizations.
• EY as a firm and its individuals have held key roles in industry consortiums and utilities.
Increase confidence that deliverables will be met and deliver value with proven track record on complex engagements
• EY was selected as program management office for various industry groups and consortia to help clients with: • Implementation of the final margin policy
framework for over-the-counter derivatives• Drafting of recovery and resolution
planning playbooks for banks with financial market utilities
• EY has a program management team with capital markets knowledge and the seniority and relevant experience to coordinate, govern and report on this complex initiative.
Provide end-to-end PMO support for all phases of the initiative across operations and technology
Dedicated Capital Markets practice
Deep pool of advisors with
extensive operations experience
Strong track record of working on
industry initiatives
World-class PMOaccelerators and
tools
Value propositionEY differentiators and experience
T+2 shortened settlement cycle 8
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