SIFMA Insights' Notebook: SIFMA Ops, May 16, 2023

SIFMA Insights is in Orlando for SIFMA's 2023 Operations Conference & Exhibition - our 50th annual event! Here are just some of our notes from today's sessions:

Innovation: As happens at many golden anniversary celebrations, the conference began with a walk down memory lane for the operations and technology industry. Regardless of the decade, a key theme emerged…innovation. Over and over again technology changes solved problems or created efficiencies based on market conditions.

1960s/70s: With surging volumes after the elimination of fixed commissions and the existence of physical delivery of stock certificates, the NYSE closed every Wednesday to catch up on the paperwork. The industry had outgrown its capacity, and a paper crisis was born. The Depository Trust Company (DTC) was created in 1973 to solve this problem, enabling capacity for the industry to grow and providing critical risk mitigation functions.

1980s: While the National Securities Clearing Corporation (NSCC) was already in existence in this decade, it was only partially responsible for clearing and settling equity trades. Each regional stock exchange – Pacific, Boston, etc. – had its own clearing depositories. Then came the October 1987 market crash. Out of crisis comes progress. NSCC consolidated the regional depositories, centralizing clearing and settlement to drive efficiencies.?

1990s: Given the widespread use of personal computers and the emergence of the Internet, industry professionals saw the opportunity to create online brokers. These firms flipped the investing model on its head, putting customers in control of their accounts. This decade also saw the shortening of the settlement cycle form T+5 days to T+3, creating efficiencies and reducing risk in the system.

2000s: While the rest of the world was trading in decimals, the U.S. was still trading in fractions. These 1/8 increments – 1/8 of $1 represents 12.5 cents – created a sizable tick. In this decade, under a rule from the SEC, the U.S. moved to decimals. Spreads tightened considerably, lowering costs to investors.?

2010s: After the Global Financial Crisis, the call came again to shorten the settlement cycle. The industry joined together to move from T+3 days to T+2. Interestingly, the technology to make this move was already there. When the industry moved to T+3, it was assumed that, eventually, the industry would move to T+2, again shortening the settlement cycle. As such, firms built their technology stacks accordingly, enabling a smooth transition.

2020s: To paraphrase Whitesnake, here we go again. The drive to eliminate risk – both liquidity and counterparty – is again moving the industry to accelerate the settlement cycle, to T+1 days from T+2. Panelists noted that firms need to have the building blocks in place to make this transition: client preparedness in our interconnected markets; affirming trades on trade date in order to meet settlement on T+1; and system resiliency, as the nineteen hours between the end of the trading day and the affirmation cycle shortens to five hours. Stay tuned, more to come on T+1, with 377 days until the go-live date on May 28, 2024 in the United States and May 27, 2024 in Canada. The clock is literally ticking - you can see it here.

Thanks to all who participated in our pre-event survey of operations professionals; you can access the results here. They'll also be included in our post-event debrief - stay tuned but, first, keep your eye peeled for our notes from tomorrow's sessions!