Third Party Attestation Asset Management Alert: T+1 is Rapidly Approaching. Are You Ready?

The need for regulatory change in the financial markets has been highlighted by class action lawsuits stemming from trading restrictions on volatile stocks in 2021. These events underscored the critical need to reduce counterparty risk and enhance liquidity and market efficiency.

On February 15, 2023, the Securities and Exchange Commission (SEC) adopted final rule amendments to Rule 15c6-1 under the Securities Exchange Act of 1934. This amendment mandated a shift in the settlement period for transactions involving stocks, bonds, municipal securities, exchange-traded funds, certain mutual funds, and limited partnerships that trade on an exchange. The settlement date will move from two business days after a trade date (T+2) to the next business day after a trade (T+1), effective May 28, 2024. As this deadline approaches, the implications for internal controls over business process and technology for broker-dealers and asset managers are significant, impacting everything from the front to back-office operations to interactions with brokers, counterparties, and custodians.

Operational and Financial Challenges

Broker-dealers will find that much of the trade processing must commence on the day of the trade itself in order to meet the shortened settlement timeframe. This adjustment is likely to increase the occurrences of settlement fails and place a significant burden on operations personnel tasked with reconciling trade exceptions, mismatches, or fails.

Asset managers will need to ensure compliance with the rule by making and keeping certain records, including confirmations received, allocations, and affirmations sent or received, each with a date and time stamp. While many asset managers are already compliant from a record keeping perspective, the reduced time frame for reconciling trade mismatches will place additional pressure on both the manager and their prime broker to ensure that all trades are reconciled on the day of trading. The rule amendment also raises important questions for managers trading across different time zones and geographies, challenging their ability to adapt swiftly to different settlement protocols.

The transition to T+1 introduces not only operational changes, but also a significant cost and implementation burden. This can create a competitive disadvantage, especially for smaller, independent organizations that must absorb the costs of technology investment to comply with the rule. It is crucial to highlight that even larger asset managers, who rely on counterparties such as prime brokers, may face challenges if these counterparty service providers are not using the integrated technology and tools, potentially leading to manual processes that increase risk and underscore the importance of a robust internal controls environment.

Testing for the implementation of T+1 is already underway across the asset management sector. Success will hinge on rigorous internal testing and efficient interaction and integration among market players, including broker-dealers, asset managers, prime brokers, and core processors such as Institutional Trade Processing (ITP), National Securities Clearing Corporation (NSCC) and The Depository Trust Company (DTC). The transition will also impact internal controls and reporting, e.g., System and Organization Controls (SOC) 1 and SOC 2 reports, necessitating the involvement of service auditors to assess changes to business process and technology controls.

Are you ready for the shift to T+1? If you need assistance with your internal controls assessment or controls testing, reach out to our third-party attestation team to get started before the deadline. Preparing now can help position your organization for a smooth transition and continued compliance.