OCC eyes banks’ preparations for T+2

Regulators have laid out road markers for how banks can develop their plans for implementing quicker securities settlements, which will become mandatory in a few months. 

The SEC and Municipal Securities Rulemaking Board earlier this year adopted rule changes to shorten by one business day the standard settlement cycle for many US securities including equities, corporate and municipal bonds and unit investment trusts. From September 5, settlement times will be cut from the present three business days, known as T+3, to two business days, known as T+2.

The rule changes are intended to reduce counterparty risk, lower margin requirements for clearing agency members, reduce pro-cyclical margin and liquidity demands during periods of market volatility, and better align the US settlement requirements with other markets around the world.

In guidance issued last week, the Office of the Comptroller of the Currency (OCC) urged banks to prepare for complying with the new time frame related to their securities activities, including banks’ investment and trading portfolios and securities settlement and servicing provided to banks’ custody and fiduciary accounts. Banks that offer retail non-deposit investment products through a broker-dealer should assess the broker-dealer’s preparedness for the new settlement time frames, officials say in a related filing. The OCC expects banks to be prepared to meet T+2 standards as of the September 5 deadline, they add.

‘Bank management and the board of directors should employ effective change-management processes and provide effective oversight to ensure banks are prepared for this industry-wide change,’ officials write. ‘Preparation includes identifying all lines of business, products and activities that involve securities settlement and servicing.’

The OCC urges banks’ management to monitor the progress of other industry participants, including: regulatory changes that affect securities settlement and servicing, system and process changes at financial market utilities, custodians’ system and process changes, and third-party system or service provider changes.

Officials say banks’ management should establish and follow a project plan for implementation, taking into account issues such as:

• Changes to investment accounting, trust accounting or other securities processing systems
• Changes to operational procedures for securities clearance and settlement, income processing, corporate action processing and securities lending
• Changes to client agreements and disclosures that reflect settlement time frames
• Client communication
• Oversight of third parties’ T+2 implementation processes
• Changes to service-level agreements with third parties providing trade clearance and settlement, income processing or other services affected by T+2 implementation
• Training for front, middle and back office employees
• Enhanced focus on risk-management practices, risk metrics and surveillance systems to spot and deal with potential increases in failed trades
• Staffing and contingency planning for the days leading up to and immediately following implementation.

The financial services industry broadly welcomes the impending arrival of T+2. For example, the Securities Industry and Financial Markets Association writes in a comment letter filed with the SEC last December that a T+2 settlement cycle will reduce credit, market and liquidity risks, promote financial stability and mitigate systemic risks to the financial system.

From an operational perspective, Shareholder Services Association executive director Abby Cowart says T+2 will pose an array of challenges in making sure companies’ systems are ready and in regards to regulatory filings (CorporateSecretary.com, 6/12).

Kim Bouch, vice president and shareholder services manager at Old National Bancorp, tells Corporate Secretary that T+2 is ‘a big question mark’. Her company uses a third-party brokerage to conduct sales and purchases of stock, and is looking at its own procedures and documentation – such as prospectuses – to make sure it is ready. She is expecting a smooth transition, but also anticipates an immediate switch to talk of T+1. In that case, the problem would be the continuing requirement for physical certificates, which cannot be processed as quickly as needed under T+1, she adds.