The Financial Industry Regulatory Authority (FINRA) has adopted amendments to conform its rules to the Securities and Exchange Commission’s (SEC) amendments to Rule 15c6-1 and adoption of Rule 15c6-2 under the Securities Exchange Act of 1934 to shorten the standard settlement cycle for most broker-dealer transactions from two business days after the trade date (T+2) to one business day after the trade date (T+1).
FINRA has been working with other regulators and market participants to ensure that the industry is prepared for the transition to T+1. In this regard, FINRA has conducted an outreach program with certain introducing and clearing firms to, among other things, discuss the actions the firms have taken and their readiness for the transition to the shortened settlement cycle, and FINRA will be conducting another such program with additional firms during the first quarter of 2024.
FINRA also has been helping to address inquiries and concerns from firms about the T+1 settlement cycle as they arise.
FINRA reminds firms that they should consider all potential impacts that the new T+1 settlement cycle will have on their business and the changes that will be needed to address these impacts. Although the potential impacts and changes will vary from firm to firm based on such things as a firm’s business lines, customer base, infrastructure and internal operations, FINRA recommends that firms particularly consider the following:
- settlement of American Depositary Receipts and exchange-traded funds with underlying foreign securities; and
- the shortened timeframe for ensuring timely settlement of end of day transactions.
FINRA further reminds firms that new Rule 15c6-2(a) requires any broker-dealer engaging in the allocation, confirmation or affirmation process with another party to either:
- enter into written agreements with the relevant parties to ensure completion of allocations, confirmations, affirmations or any combination thereof, as soon as technologically practicable and no later than the end of the day on trade date; or
- establish, maintain and enforce written policies and procedures reasonably designed to ensure completion of allocations, confirmations, affirmations or any combination thereof, as soon as technologically practicable and no later than the end of the day on trade date.
Firms should discuss this requirement with all appropriate vendors or clearing firms with which they work to develop processes and procedures so that allocations, confirmations and affirmations will be completed within the necessary timeframe. Firms also should communicate with their buy-side clients that are integral in providing the trade allocation and matching information. Firms should focus on ensuring that clients understand their responsibilities and the procedures that will be enforced to achieve same-day affirmation.
To help firms ensure that they are prepared for the transition to the shortened settlement cycle, FINRA encourages all firms to participate in the industry’s T+1 testing program, which is designed to allow firms to test for the entire trade life cycle, including trade affirmation, confirmation, clearance, settlement and trade exception flows.
FINRA also recommends that firms test with the appropriate testing facilities for the changes to transaction reporting and the change from 2:30 p.m. ET to noon ET for when match-eligible clearing trades are automatically locked in and submitted to DTCC.
