T+1 settlement cycle in the US, Canada and Mexico

HSBC have a focused internal Project team with Working Groups spanning Front Office, Operations, Support functions, Risk and Control functions, IT (internal and external) as well as participation in industry / market events and initiatives for T+1 readiness.

HSBC have executed a plan to incorporate settlement workflow changes and bolster operational support in readiness for T+1 compliance. HSBC are presently in the midst of Industry testing targeting mid-April for completion well in advance of the regulatory go-live date.

Removing one day from the settlement process will require the acceleration of all post-trade activities and processes. Hence our focus is on increased efficiency, automation, system changes and process re-engineering, to work within the shortened settlement cycle. Since affirmations for T+1 settlement will be extended up to 9pm on trade date, we have enhanced Operational support through a follow the sun approach to extend processing times for this market. We have also considered that these assets are executed globally and have mapped out how these changes will impact processing within each region.

Instruments in scope are equities, corporate debt, and unit investment trusts. For further specifications please refer to DTCC's website.

Those instruments will not change, they are not in scope to move to T+1 and they will continue to settle on a T0 basis.

Affirmation effectively acts as the acknowledgement of trade details between brokers and Investment Managers. Affirmation of broker confirms does not necessarily guarantee settlement. Affirmation process occurs pre-transaction settlement.

The new cut-off will be Trade Date “TD” at 9pm EST.

HSBC support our clients in their preferred method of affirmation, though the majority of the market affirm securities electronically. Trades are affirmed intraday on T0. Both parties submit / confirm their side of the trade; providing these match and there are no SSI issues, this is affirmed. Any exceptions are flagged and remediated. If a client affirms manually this has more risk associated, as it slows down the process of affirming, especially when remediation is required.

Listed below are some examples of wider processing we anticipate will need to be modified either systemically (timing or settlement configuration), or behaviorally (how things are conducted in a T+1 environment). All are part of an inventory being addressed through focused working groups:

• Control activities currently conducted on T+1
• Reconciliation & position management for asset servicing and inventory purposes
• Processing of assignments on listed options
• Clearing activity for overseas trading
• Baskets - i.e. Account Data Services engagement on account and securities setups, new PLAs
• Dependencies on Primary Trading System reporting
• Availability of market data
• FX & Funding requirements for Asia Pacific counterparties / clients
• Structured Notes processing

Examples of the challenges outlined will be addressed through either process re-engineering, small IT configuration/automation or timing changes as well as behavioral changes (more timely completion of settlement functions etc). We are working both internally and with external parties such as the DTCC and IT vendors including Broadridge.

HSBC is confident in meeting the migration date and adoption of T+1. HSBC is a key advocate for increased market efficiency and risk reduction and thus, like many market participants, welcomes the shortening of the US settlement cycle from T+2 to T+1. HSBC continues to collaborate with industry bodies (SIFMA, DTCC, ICI, etc.) and to work on required changes internally, to ensure a smooth transition to the shortened settlement cycle for both ourselves and our clients.

HSBC is assessing the potential advantages and use of the CTM ‘Match to Instruct’ (M2i) workflow created by DTCC for T+1 which is said to enhance and accelerate the CTM matching process.

It can automatically trigger Affirmation and delivery of DTC eligible instructions directly to the DTC for settlement, when a trade match between an investment manager and executing broker occurs. Clients utilizing an M2i workflow achieve the significant benefit of central matching and auto-affirmation compared to affirmation by the custodian. It’s important to note that in order to benefit from this functionality, users must store their SSI’s in ALERT.

For securities lending the focus remains around settlement efficiency and liquidity, to ensure there is enough cash and/or securities available to support our settlement obligations in the shortened settlement cycle. A large part of the current settlement window is devoted to ensuring the positioning of currency balances, inventory, which will need to be preserved in the T+1 environment. We are thus considering automation techniques via internal systems or third-party vendors. This is alongside a review of the detailed industry testing guidance with testing windows starting in Q3 2023.

HSBC do not have any confirmed plans to revise settlement instruction deadlines at this time. We will confirm in due course any changes to client instruction deadlines.

HSBC has no current plan to change our contractual settlement policy as it relates to US DTCC instruments.

HSBC has aligned operational resources to support the new T+1 timelines. New account / SSI opening requests will be actioned up to 9PM EST (new affirmation cut-off) with requests received after 6:30 PM on a best efforts basis.

All industry firms should review their existing SSIs and validate they have the correct counterparty SSIs. Incorrect SSIs will result in late trade matching and could result in unnecessary fails.

Upon compliance Ex-Date will align with the Record Date for regular-way corporate actions. With regular way ex-date, due bills are not necessary as any trade entitled to the dividend will settle on record date. However, due bills are required for any ex-date that is not a regular way ex-date.

The SEC final rule does not specifically mandate all OTC derivatives settle on a T+1 basis. Market participants should be aware of the impact that the T+1 move will have on derivatives which are associated with underlying equities. For some derivative products, participants should consider adjustments in their settlement timeframes to align with the reduced equity settlement cycle, even in the absence of a regulatory requirement or updated industry conventions. These may include, inter alia, equity swaps, OTC equity options, OTC derivative transactions hedging notes, and in some cases “exotic” OTC derivatives transactions.

No it does not. Even in affirmed trades a counterparty can still fail if sufficient position inventory and cash availability are unavailable to support the trade. Affirmation does significantly increase the likelihood of successful settlement.

The industry is changing the securities lending recall cutoff time from 3:00PM EST on T+1 to 11:59 PM EST on Trade Date. Firms need to work with their service providers to align to this earlier recall process.

At this moment, no penalties have been published for either late or unaffirmed trade settlement. The regulators have stated however that they will monitor firms affirmation rates for compliance.

Yes, and they will need to be instructed and matched promptly on T+0. Analysis of HSBC’s potentially impacted trade population shows approximately 80% of activity is executed prior to the CLS cut-off and therefore would still be captured for CLS settlement in a compressed T+1 timeframe.