“In the UK, you will have to decide what policy and timing is right for you. I don’t suspect you will follow the timing of Argentina or Jamaica. I’d note, though, that if one looks at the 27 months it took the US from proposal to implementation, your implementation might be June 2026.” 

With the US well into its third week of T+1 settlement for equities, corporate bonds, and municipal securities, a change in the UK would align with the US market structure with its treasury markets and the UK’s gilt market, both of which already operate on a T+1 cycle. 

Gensler recounted the smooth transition in the US, which took 27 months from the proposal to implementation. He noted that setting and sticking to a firm implementation date was crucial for this success, acknowledging the collective efforts of market participants, clearing houses, and regulators.

“It’s essential to set a firm implementation date and stick to it. This collective action issue ensures market participants allocate resources for software updates and other necessary preparations. Having a set date helps organise system planning and implementation,” he stressed. 

The current timeline for the UK appears to include a plan being put in place in 2025 with the implementation of a T+1 settlement cycle in UK occurring no later than 31 December 2027. This, however, is still up for debate and subject to change. 

Gensler highlighted the global trend towards shorter settlement cycles, noting that Canada, Mexico, Argentina, and Jamaica have also adopted T+1. “Time is money and time is risk,” he said. “Shortening the clearing and settlement cycle saves money and lowers risk, which increases efficiency, boosts liquidity in the markets, and promotes resiliency during times of stress. 

“For everyday investors, this means that if you sell your stock on a Monday, you now get your cash on Tuesday, instead of having to wait until Wednesday,” Gensler explained. “This change is significant for the 58% of American households holding stock, many of whom were previously puzzled by the two-day waiting period,” he added. 

Echoing Gensler’s sentiments, Andrew Douglas, who chairs the UK T+1 Taskforce Technical Group, also stressed the importance of setting a firm date for the transition. This collective action issue ensures market participants allocate resources for necessary preparations, such as software updates and system planning. 

A collective effort 

Looking at the key takeaways, Gensler stressed that the settlement transition requires market collaboration. “Transitioning to T+1 is a team effort involving thousands of market participants, including clearing houses, depositories, custodian banks, broker-dealers, investment advisors, self-regulatory organisations, stock exchanges, service providers, industry groups, trade associations, and regulators. It’s also a global effort.” 

He shared that the SEC has engaged with market participants and regulatory counterparts worldwide, including in the Americas (Canada, Mexico, Argentina, Jamaica, and Peru), the UK, Europe, and Asia. This global coordination is crucial because of the interconnected markets, he said.   

T+0? 

Additionally, Gensler emphasised the importance of same-day or T+0 allocations, confirmations, and affirmations, which are critical for the movement of securities and cash on T+1. “When we proposed the rule in February 2022, only about two-thirds (68%) of transactions were being affirmed on trade day. By 29 May, the day after the transition, T+0 affirmation rates were approximately 95% by 9pm,” Gensler reported.  

“International investors may need to adjust their operations to manage foreign exchange risks, potentially moving to T+0 instead of waiting a day after the trade,” he noted, adding that the collective net benefit of lower risks and increased efficiency outweighs these costs. 

“Time zones also play a significant role in the transition. The UK might have an advantage because you can learn from our experience, being to the west of you. For us, it was more challenging because we were pioneering the shift. European asset managers moved staff to the US to manage foreign currency risks during the US 4PM to 6PM time zone rather than late at night in Europe.” Gensler said. He pointed out that European asset managers moved staff to the US to manage foreign currency risks during the US time zone, which could be a consideration for the UK. 

Mutual funds and ETFs in the US have largely adopted a one-day settlement cycle by business practice, aligning portfolios from treasuries to equities. Gensler highlighted that this change reduces market complexity, particularly in the area of corporate actions, where the ex-dividend date now aligns with the record date. 

Gensler reiterated the importance of this transition for the financial system. “Waiting two days to get your cash after selling something is outdated,” he stated. “This transition lowers margin requirements, frees up liquidity for clearing house members, and reduces risk. Although it might seem like a minor change in the market’s infrastructure, it has significant benefits. This requires a team effort for a smooth transition, as we saw in the US and the Americas.” 

Points for further discussion 

Looking ahead, Gensler outlined three key areas for further discussion. Firstly, he detailed new rules enhancing central clearing in the US Treasury market, scheduled for phased implementation over two years. 

These rules enhance customer clearing and broaden transaction scope, making the Treasury market more efficient, competitive, and resilient, he noted. “By March 2025, the separation of house and customer margin must be completed, meaning a clearing house can no longer net customer margin against house margin. By the end of 2025, certain cash transactions must be cleared, and by June 2026, repo and reverse repo transactions must be cleared. These dates are set, and I encourage everyone to start preparing, especially for March 2025.” 

He then advocated for regulators and market participants globally to consider shortening the settlement cycle for currency trading. “Currently, currency markets settle in T+2, but if major markets in North America and Asia move to T+1, it could be beneficial. Engaging with central banks and CLS about this possibility is crucial.” 

Gensler then moved on to encourage exploration of same-day settlement practices. “Moving affirmations and allocations to the same day and possibly settling transactions into the evening, like in China, could be beneficial. Our money markets, commercial paper, and certificates of deposit already operate on a T+0 basis. China and India are exploring this as well. These are discussions for the future, and you’ll need to decide what’s right for you, considering what’s happening elsewhere, particularly in Europe and the EU.” 

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Senvest Management is a registered investment advisor based in New York, employing investment strategies across approximately $3 billion in assets under management.

Senvest has admitted the facts set forth by the watchdog’s order, acknowledging that its conduct violated the federal securities laws and has agreed to pay a $6.5 million penalty, alongside agreeing to implement improvements to its compliance policies and procedures.

The SEC’s order found that from at least January 2019 until December 2021, Senvest employees at multiple levels of authority communicated about company business internally and externally using personal texting platforms and other non-Senvest messaging applications, in violation of the firm’s policies and procedures.

The advisory firm also failed to maintain or preserve the off-channel communications as required under the federal securities laws.

According to the SEC, in one instance, three senior employees engaged in off-channel communications on personal devices that were set to automatically delete messages after 30 days.

Elsewhere, the order concluded that certain Senvest employees failed to adhere to provisions of the firm’s code of ethics requiring them to obtain pre-clearance for all securities transactions in their personal accounts.

“The Commission continues to focus on regulated entities’ compliance with the recordkeeping requirements,” said Eric Werner, director of the Fort Worth regional office.

“Adherence to these requirements is essential for the Commission to effectively exercise its regulatory oversight and enforce the federal securities laws.”

Alongside the $6.5 million penalty, Senvest was censured and ordered to cease and desist from future violations of the relevant provisions of the federal securities laws.

Senvest also agreed to retain a compliance consultant to conduct comprehensive reviews of its policies and procedures relating to the retention of electronic communications found on personal devices, and the framework for addressing non-compliance by its employees with those policies and procedures.

Last year, US regulators handed out historically high combined penalties for recordkeeping and supervision failures.

Most recently, The Commodity Futures Trading Commission (CFTC) issued an order simultaneously filing and settling charges against Goldman Sachs for violating the cease-and-desist provision of a previous order.

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The US watchdog is looking to bolster risk management practices for central counterparties in the US Treasury market and facilitate additional clearing of US treasury securities transactions through forcing some cash Treasury and repos to be centrally cleared.

The SEC stated that additional rule changes are designed to reduce the risks faced by a clearing agency and incentivise and facilitate additional central clearing in the US treasury market.

“Today’s adopting release addresses clearing of treasury securities in two important ways,” said Gary Gensler, SEC chair.

“First, the final rules make changes to enhance customer clearing. Second, the final rules broaden the scope of which transactions clearinghouse members must clear. I am pleased to support these rules because they will help to make the treasury market more efficient, competitive, and resilient.”

New amendments from the SEC also permit broker-dealers to include customer margin required and on deposit at a clearing agency in the US treasury market as a debit in the customer reserve formula, subject to certain conditions.

Elsewhere, the amendments require covered clearing agencies in this market to collect and calculate margin for house and customer transactions separately.

Policies and procedures designed to ensure that the covered clearing agency has appropriate means to facilitate access to clearing are also required as part of the amendments, including for indirect participants.

Kevin McPartland, head of market structure and technology research at Coalition Greenwich noted in a social media post that “finally [there is] some clarity from the SEC on Treasury and repo clearing. Bottom line: most repo must be cleared; Treasury trades between dealers must be cleared; dealer and customer margin must be kept separate.”

The SEC stated that the amendments also include an exemption for transactions in which the counterparty is a central bank, sovereign entity, international financial institution, or natural person.

“DTCC remains committed to supporting the industry and providing solutions that enable compliance with the expanded treasury clearing rule,” the firm said in an issued statement. 

“We are prepared for this significant undertaking and will continue to evolve our access models and enhance capital efficiency whenever possible to effectively support our clients. At the same time, we will continue to facilitate industry discussions and provide education and leadership around this important topic, as we work together towards a successful implementation.”

BNY Mellon’s head of market structure, Nathaniel Wuerffel, labelled the development as the most important day for the structure of ‘the world’s most important market in decades’, in a social media post.

“In finalising the rule the commission made key adjustments from the proposal that narrow the scope in the cash market and allow for inter-affiliate transactions,” he said. “Importantly, cash market transactions will have two years for implementation and repo will have two and a half years. This is better than expected and important for a smooth transition.”

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Named Rule 13f-2, the new rule will require institutional investment managers that meet or exceed specific thresholds to report short sale related information for equity securities through Form SHO.

Following this, the Commission will aggregate data about large short positions, including daily short sale activity, by security – maintaining the confidentiality of the reporting managers, alongside publicly disseminating the aggregated data via EDGAR on a delayed basis.

According to the SEC, this new data will supplement the short sale data that is currently publicly available.

“In the wake of the 2008 financial crisis, Congress directed the SEC to enhance the transparency of short selling of equity securities,” said Gary Gensler, SEC chair.

“Today’s adoption will promote greater transparency about short selling both to regulators and the public. This rule addresses Congress’s mandate and improves upon existing sources of short sale-related data in the equity markets. Given past market events, it’s important for the Commission and the public to know more about short sale activity in the equity markets, especially in times of stress or volatility.”

Elsewhere, the Commission has amended the National Market System Plan (NMS Plan) which governs the consolidated audit trail (CAT).

The amendment will require each CAT reporting firm (reporting short sales) to indicate when it is asserting state when it is asserting the use of the market making exception in Rule 203(b)(2)(iii) of Regulation SHO.

On the same day, the SEC also adopted new reporting requirements for securities lending transactions in the US, pivoting on a major aspect of the regulation in the final rules.

The proposed rule 10c-1 which was first put on the table at the end of 2021 was set to require securities lending information to be reported within 15 minutes of a loan being made, a requirement which many said would impose significant operational and compliance burdens on broker-dealers and other market participants.

In the final ruling the SEC has changed the reporting requirement to occur at the end of the day. 

The move under chair Gary Gensler seeks to bring “securities lending out of the dark”, the SEC chair said back in 2021, and increase the transparency and efficiency of the securities lending market.

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Expected to launch in January 2024, the development will help create capital efficiencies for clearing members that trade and clear both US treasury securities and CME Group interest rate futures.

The arrangement will enable clearing members of CME and the Government Securities Division (GSD) of DTCC’s Fixed Income Clearing Corporation (FICC) to cross-margin an increased range of products, including CME Group SOFR futures, Ultra 10-year US treasury note futures and FICC-cleared US treasury notes and bonds.

“In line with our longstanding commitment to provide capital efficiencies to market users, we are very pleased to bring this enhanced cross-margining arrangement to the treasury marketplace in January,” said Suzanne Sprague, CME Group’s global head of clearing and post-trade services.

“We appreciate the opportunity to further our collaboration with DTCC for the benefit of market participants who trade across cash and futures markets.”

In addition, repo transaction that have treasury collateral with a time to maturity that exceeds one year will also be eligible for the new cross-margining arrangement.

­­“The approval of the arrangement paves the way for increased efficiency and resiliency of the overall US treasury market, and we look forward to working with CME Group to deliver upon these important enhancements,” added Laura Klimpel, general manager of FICC and head of SIFMU business development at DTCC.

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The four separate rulemakings put forward by the US Securities and Exchange Commission (SEC) in December last year represent the most significant attempt to revamp market structure for US equities in recent memory.

It’s been around 18 years since the introduction of Reg NMS by the SEC – a series of initiatives designed to modernise and strengthen the national market system for equity securities – and those in favour of modernising argue that the US’ two-decade lag in regulatory evolution has paved the way for certain levels of arbitrage across the industry that needs to be stamped out.

“The development of the current rules was informed by technological capabilities that today seem hopelessly archaic. Eighteen years ago, a turnaround time of 500 milliseconds seemed incredibly fast. Now people operate in nanoseconds,” says Daniel Schlaepfer, chief executive and president of Select Vantage Inc. 

“In the intervening years, people have developed strategies to arbitrage the outdated rules to their advantage, often to the detriment of market integrity. It’s been a long time since there’s been a revisit – Reg NMS was 2005 – and it’s a vastly different marketplace than it was back then.”

Among the SEC’s reforms is the proposal to amend certain rules under Reg NMS to adopt variable minimum pricing increments – or tick sizes – for the quoting and trading of NMS stocks. Elsewhere, is the suggested reduction of access fee caps for protected quotations and the acceleration of the transparency of the best priced orders available. Both, according to the regulator, are designed to enhance trading opportunities for all investors, ensuring that orders placed reflect the best prices available.  

Given that equity market structure in the US has not seen any major updates since 2005, the SEC’s proposals will likely cause some growing pains. The reforms, whilst well intended, have proved divisive among participants, and many argue such a large implementation could be disruptive to how the market operates. If these proposals were to come to fruition in their current form, it would be a massive overhaul – with perhaps too much change in one go. While evolution of equities market structure in the US is long overdue, what form it should come in is up for debate. 

Access fees

Though many agree that some level of modernisation is necessary and beneficial to the industry, the devil is in the details. The SEC has opted for a granular and fairly complex approach, particularly with regards to the proposed new access fee and tick size regimes. 

“The tick size proposal, in name only, is simple and one-dimensional, but in practice, there are changes to rebates, there are changes to pricing tiers, there are changes to odd lot data that’s being disseminated,” says Eric Stockland, managing director, electronic trading for BMO Capital Markets. 

“This is like a big plumbing change and it’s going to impact institutions directly and affect what algos they use, what their implementation costs are, and just the way that stocks are even quoted and traded.”

While the changes to the access fee regime are designed to reduce the cost of accessing quotes for all types of investors, institutional investors have become increasingly concerned about the impact the proposals will have on the cost of trading and cost of liquidity sourcing, arguing that they could have a detrimental effect on incentives tied to liquidity provision that could disincentivise firms looking at trading.

“While the explicit costs of accessing that quotation may go down, the implicit costs, which I would say is the spread in the security, is going to go up and we think it will increase more than the actual explicit fee will decrease,” highlights vice president and head of US equities and strategy for North American trading services at Nasdaq, Chuck Mack. 

“Institutions costs will go up in the end, which is probably not the outcome that they’re looking for. Looking at tick size too, if you don’t get that right, you can reduce and fragment liquidity and make it more costly to trade.”

Tick sizes

Several of institutions’ main concerns surround the SEC’s tick size proposal, with many suggesting the broadening out of increments in which an institution can quote inside of the best bid offer could fragment liquidity at a given price point. 

“When you broaden that out, institutions are going to struggle at a particular price, to find that block liquidity that they need to get in and out of what are very, very large positions,” says Jeff O’Connor, head of market structure, co-head coverage Americas at Liquidnet.

From an EU perspective, the European Securities and Markets Authority (ESMA) re-addressed its tick size regime in 2018 to combat concerns that Brexit will leave trading venues in the EU at a competitive disadvantage. Previous rules meant that the minimum tick size would be applicable to shares in accordance with the adjusted average daily number of transactions on the most liquid market in the EU.

However, ESMA noted that while this is an adequate liquidity indicator for most equity instruments, it may not be suited to instruments where the most liquid venue is located outside of the European Union, such as the UK post-Brexit. The new tick size regime proposed by ESMA meant that regulators of European trading venues will be allowed to calculate the average daily number of transactions on a case-by-case basis, taking into account the liquidity available on third-country venues in calibration of tick sizes.

“Proposals to reduce and harmonise tick sizes across exchanges and off-exchange venues make sense but must be appropriately calibrated to prevent any adverse impact on price discovery and lit liquidity,” says Edward Monrad, head of corporate strategy at Optiver. “Although it’s not perfect, the EU’s tick-size regime may offer a good blueprint for a dynamic tick-size regime.”

Minimum bid ask spreads

Last updated in 2005, the move to reduce the minimum bid ask spread to a penny was deemed as dramatic by industry participants, especially given the 25 cent spreads seen a few decades prior. According to the SEC, its proposals to amend minimum pricing increments are designed to enhance trading opportunities and to help ensure that orders placed in the national market system reflect the best prices available for all investors.

Those who are hesitant to the reform suggest systems will not be able to handle this. However, as the structure currently stands, significant volumes in stocks priced below a dollar that already trade at sub-penny increments, alongside existing inverted markets and the proliferation of embedded dark orders, suggests that current systems are more than capable of handling the changes that they are concerned about. 

“Many stocks, given their risk and liquidity constraints, will trade much wider than a penny, and that is perfectly fine,” argues Ian Bandeen, chairman of the board of Select Vantage Inc. 

“Indeed, some might say that facilitating trading at the highest level of efficiency that the markets will bear is exactly what we should be promoting. If firms can employ better technology to profitably provide tighter spreads for the most liquid securities, then we should encourage, not thwart, that evolution.”

Many argue the rapid proliferation of more advanced order entry and risk management technology has allowed market makers and participants to profitably provide sub penny spreads for over a decade. 

“You have got to applaud the SEC for having the gumption to address these issues and taking on the hard battles,” adds Bandeen.

“There are some very powerful, well-entrenched special interests who will rightfully see this as a direct attack on their business models. At its core, the real issue revolves around who the markets should benefit – the vast majority of institutional and retail investors, or a narrow subset of powerful intermediaries. What the SEC is trying to achieve seems to be a return to fundamental first principles. Politically though, they are walking into a well-funded firestorm.”

Enforcing best execution

The debate surrounding who the markets should revolve around is echoed into the SEC’s proposal to put best execution in writing. As one of the four pillars of the SEC’s proposals, the new rule would establish a best execution regulatory framework for brokers, dealers, government securities brokers, government securities dealers and municipal securities dealers. 

“If adopted, [Regulation Best Execution] would help ensure that brokers have policies and procedures in place to uphold one of their most important obligations: to seek best execution when trading securities, whether equities, fixed income, options, crypto security tokens, or other securities,” says Gary Gensler, chair of the SEC. 

“I believe a best execution standard is too important, too central to the SEC’s mandate to protect investors, not to have on the books as Commission rule text.”

The proposal would require broker-dealers to establish, maintain, and enforce written policies and procedures reasonably designed to comply with the proposed best execution standard, alongside requiring these policies and procedures to address how broker-dealers comply with the best execution standard and how they will determine the best market and make routing or execution decisions for customer orders.

“The best execution proposal is one that I don’t see getting through because in practice, we execute with the best market possible. Routers on a trading desk are still going to be forced to go to the best venue possible, so that doesn’t really change,” notes O’Connor. “There would be a big change if the retail auction component was to come to fruition. We would all have to adjust how we interact with the exchanges, it’s going to be another venue that traders need to send their child orders to. Certainly, there will be a lot of burden on broker dealers to adjust their routing and adding venues, but it’s not incredibly impactful.”

A retail lightening rod

Perhaps most divisive are the proposals set to fundamentally change the way the retail markets operate. As part of its best execution crusade, the US watchdog’s new proposals enforce that certain orders from retail investors be exposed to competition in fair and open auctions before such orders could be executed internally by any trading centre that restricts order-by-order competition. 

“That particular proposal was a bit of a lightning rod for controversy, and we took a position where we’re advocating for market-based solutions rather than regulatory edict,” explains Stockland. “If there’s an opportunity for us and our clients to interact more with retail, we will absolutely be ready for that day one, and we have some ability within our strategies to behave opportunistically in response to retail opportunities.”

Payment for order flow (PFOF) – which is a form of compensation through transferring some of the trading profits from market makers to brokerages in return for directing order from a range of parties to be executed with them – and its widespread use has become a controversial topic globally. Many argue that this order flow – which the growing retail segment contributes significantly towards – should be won by publishing competitive quotes instead. 

According to 606 reports gathered by the SEC, Citadel Securities forked out $2.6 billion in 2020 and 2021 on PFOF, most of it on options, followed by Susquehanna (G1X global execution brokers), which spent a $1.5 billion and Virtu which spent $654 million in the same period.

The SEC has concluded that retail investors do not currently benefit from a fair and competitive market, due to the lack of a level playing field among various aspects of the market, namely wholesalers, dark pools and lit exchanges. As part of its proposed overhaul, the regulator has highlighted that the markets have become increasingly hidden from views, especially for retail investors. Over 90% of marketable orders for stocks listed on US securities exchanges by retail investors are routed to a small group of off-exchange dealers (wholesalers) – reflecting that these orders impose lower costs on liquidity providers than unsegmented order flow, said
the SEC.

And, these wholesalers typically execute the marketable orders of individual investors internally, without providing any opportunity for other market participants to compete to provide better prices – meaning they are not only segmented but are also isolated from order-by-order competition. 

If executed correctly, the watchdog’s proposal could mean both retail and institutional investors will benefit from increased competition for orders.  

“The loudest current fearmongers are primarily just the entrenched special interests with the most to lose from enhanced market efficiency and integrity. Bringing retail order flow back into the open markets will benefit everyone. Liquidity begets liquidity, and more liquidity means greater efficiency and less risk,” says Schlaepfer. “The only people who will be negatively impacted will be those whose business models relied on abusing outmoded rules to their exclusive benefit.”

What happens next?

The SEC first announced its equity market structure proposals in December last year, with a public comment period opened until 31 March. As of now, the SEC has not revealed which proposals will come into fruition and to what extent, but it goes without saying that the industry will be kept on it toes as the final verdict builds anticipation. The proposals themselves have resulted in wide industry discussion. Whether viewed as disruptive or not, they aim to improve competitiveness in the market – which is something that should be viewed as beneficial.

“These changes are about improving competition and efficiency in the market. We can debate the details and talk about the nuance, but ultimately, institutions benefit from a more efficient market,” concludes Stockland. 

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Crypto trading platform Bittrex – along with its former chief executive, William Shihara – has been ordered to settle SEC charges for failing to register as an exchange, broker and clearing agency.

Bittrex and Bittrex Global agreed to pay a total payment of £24 million – specifically, a disgorgement of $14 million on a joint and several basis, a prejudgment interest of $4 million, and a civil penalty of $5.6 million.

Earlier this year in April, the SEC found that Bittrex was operating an unregistered national securities exchange and providing services to US investors related to crypto assets which were offered and sold as securities.

The business was also found to have “directed issuers who sought to have their crypto assets made available for trading on Bittrex’s platform to first delete from public channels certain “problematic statements” that Shihara believed would lead a regulator, such as the SEC, to investigate whether the crypto asset was offered and sold as a security.”

In the settlement, which is subject to court approval, neither Bittrex nor Shihara have admitted or denied any wrongdoing in response to the SEC’s allegations.

This news follows the SEC’s ruling earlier this week which ordered 11 Wall Street firms $289 million for widespread recordkeeping failures, having been found to have been using longstanding “off-channel” communications following an investigation . 

Gurbir Grewal, director of the enforcement division at SEC, said: “For years, Bittrex worked with token issuers to ‘scrub’ their online statements of any indicia that they were investment contracts—all in an effort to evade the federal securities laws. They failed. 

“Today’s settlement makes clear that you cannot escape liability by simply changing labels or altering descriptions because what matters is the economic realities of those offerings. I am grateful to the SEC staff for aggressively pursuing non-compliance in the crypto industry, resolving this matter, and bringing additional relief to harmed investors.”

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The new rules have a specific focus on the way predictive data and similar technologies are used to interact with investors, in an effort to prevent firms from placing their interests ahead of those of investors.

“We live in an historic, transformational age with regard to predictive data analytics, and the use of artificial intelligence,” said Gary Gensler, chair of the SEC.

“Today’s predictive data analytics models provide an increasing ability to make predictions about each of us as individuals. This raises possibilities that conflicts may arise to the extent that advisers or brokers are optimising to place their interests ahead of their investors’ interests.”

In a statement, the SEC highlighted that the use of certain technologies can lead to investors suffering financial harm in a more significant and broader scale than previously possible.

The proposed rules would require firms to evaluate and determine whether certain technologies will be able to be used to place their own interests above those of investors, while also requiring firms to eliminate or neutralise the effect of any such conflicts.

Firms will have to employ tools to address these risks that are specific to the particular technology used, consistent with the proposal.

Elsewhere, the proposed rules would require firms to have written policies and procedures in place to achieve compliance with the proposed rules and to adopt and maintain books and records related to these requirements.

“When offering advice or recommendations, firms are obligated to eliminate or otherwise address any conflicts of interest and not put their own interests ahead of their investors’ interests,” added Gensler.

“I believe that, if adopted, these rules would help protect investors from conflicts of interest — and require that, regardless of the technology used, firms meet their obligations not to place their own interests ahead of investors’ interests.”

The proposals come days after Gensler’s address at the National Press Club, in which he highlighted a number of concerns relating  to the use of artificial intelligence.

Among the concerns are the potential systemic risks which could be posed from too many firms becoming reliant on AI models that are constructed in a similar manner. With this, in the advent of volatility, AI models are likely to correlate in their movement.

Elsewhere, Gensler noted the importance of teams being able to explain and understand the technology they are using, as well as the need to acknowledge misinformation in some AI models.

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Panellists raised concerns over FX, settlement fails, and potential regulatory hurdles during the webinar held by AFME on 27 June.

Speaking to the key considerations for the European buy-side community, Susan Yavari, regulatory policy advisor – capital markets at European Fund and Asset Management Association (EFAMA) highlighted that identifying potential pain points is the overarching focus.

The buy-side are “aware and worried,” she said, confirming that implementation had only begun in the last few months. Yavari stressed that the principal challenges stem from the settlement mismatch of T+1 in the US and T+2 in Europe and the subsequent funding gap.

The shift to T+1 presents a growing list of operational challenges to the buy-side. Chief among those raised by the panel is the question of how much cash can be held in funds and the potential for an increased number of regulation breaches during hold ups. Other difficulties also arise from having to recall stocks in a much shorter timeframe.

Potential solutions around operational challenges include European night desks or US buildouts, however, both are potentially costly and therefore not viable options for all firms.

Specifically with regards to foreign exchange, working from a new compressed timeframe makes the market a much less attractive environment in which to source FX, Yavari explained.

The rule amendment has had operational consequences across Europe thanks to the level of interconnection between US and European securities. However, despite the forewarning there are significant gaps in levels of preparedness, the experts agreed.

Barnaby Nelson, chief executive of The ValueExchange highlighted that their studies had demonstrated significant differences between firms’ readiness.

The recent report from The ValueExchange found that only 46% of the market is on course to be ready for the shift to T+1 next March, with “investors so far not engaged”. The paper suggested that investors risk overestimating their reliance on their service providers in their efforts to prepare.

Though the speakers agreed that there had been a lot of ground made up in the last couple of months, Nelson explained that there are a portion of institutional investors who are not yet where they need to be and must move on from the scoping phase into the project phase now.

Nelson also suggested that the idea of setting up settlement teams for failure must be avoided and T+1 should be viewed an enterprise-wide conversation and fundamentally something that affects various stages, from onboarding, to middle-office allocations, and funding.

This was echoed by Emmanuelle Riess, custody product manager and Director at BNP Paribas, who expressed that preparation at all stages is the key to operating efficiently in this compressed environment.

She highlighted the importance of both downstream and upstream systems maintaining a smooth and timely flow between them in order to be successful at the end point, with all pre-settlement controls correctly executed.

Empirically, Riess confirmed that BNP Paribas is focused on “a healthy review” of its technology across these stages, looking at automation and towards removing manual tasks.

She expressed that it is the preparedness of clients, and communication with them, which are the key pillars for a successful transition to the new system.

Sachin Mohindra, executive director at Goldman Sachs added that for their clients, efficiency in middle-office processes (post-trade processing time between trading and settlement) is the main focus now whilst getting ready for the move. He highlighted that over the next few months solutions for the FX access to liquidity should be prioritised.

Following the US Securities and Exchange Commission (SEC) vote to shorten the settlement cycle to one business day back in February of this year, the market now has until 28 May 2024 until implementation.

A recent T+1 event from Xceptor found that over half (52%) of participants believe that next year’s deadline will be postponed.

Yavari highlighted that the lack of a seamless and coordinated approach to this transition since its inception was in her opinion largely down to the ‘T+1 playbook’ focusing principally on the domestic US market, suggesting that – though one third of the US equities market is owned by foreign investors – there was a fundamentally unbalanced approach to the T+1 project.

She added that the momentum from the meme stock saga in early 2021 being the trigger for T+1 being pushed through – which the DTCC are not keen to acknowledge – was arguably not the best motivation to implement a new policy.

Closing up the discussion, panellists also touched on the potential for reinstating global harmonisation in the form of T+1 in Europe, and the challenges this could present. Pablo García Rodríguez, manager, post-trade at AFME, stated that there are several significant structural differences needing to be considered before this possible move.

In particular, he called attention to the fragmentation of European markets and the distinct regulations and tax regimes across jurisdictions, explaining how reintroducing alignment on a global level would be a significant challenge as a result of the differences between the US and Europe.

Additionally, he identified the relevance of different CSD’s (Central Securities Depository) across the EU member states, highlighting that within the CSD regulatory space, cash penalties are already imposed on participants failing to settle transactions on its due intended settlement dates. Within a T+1 timeframe, these issues would just be exacerbated, he explained.

An EU T+1 taskforce has been launched with two separate work streams, according to AFME. As well as focusing on the US T+1 impact on European markets, subgroups are also reviewing whether the EU could and should move to T+1.

The post Buy-side ‘aware and worried’ about T+1 as implementation and testing ramps up appeared first on The TRADE.

Following the implementation of Mifid II in 2018, Europe unbundled trading and research, resulting in all asset managers having to pay for research in cash only. This contrasted regimes in the US, which had an opposite approach, with the SEC requiring research to be paid in commissions alongside a trade – disallowing research to be paid for in cash.

To resolve the disconnect in approaches, in its 2017 no-action letter to SIFMA, the SEC advised that it would not recommend enforcement action to broker-dealers accepting cash payments for research from investment managers which are required by Mifid II to pay for research from its own money as opposed to client commissions or ‘soft dollars’. 

However, in July last year, the SEC shocked market participants by providing notice that it would allow the ‘no-action’ letter to expire on 3 July 2023, with the viewpoint that there were viable solutions and enough time for asset managers to adapt to the rule change.

In May, the House Financial Services Committee had a unanimous vote to ‘direct’ the SEC to extend the letter once again, however, the US watchdog remained steadfast in its reluctance, allowing the ‘no-action’ letter to lapse, which will likely have a negative impact for the research market, including institutions and research providers.

“This is another stage of regulatory confusion and misalignment between regions,” said Mike Carrodus, chief executive of Substantive Research, speaking exclusively to The TRADE.

“The ‘no-action’ letter was designed to solve this misalignment, but as far as the SEC was concerned, the word temporary was a pretty important signifier for the market. What it means for this market and this industry is that everyone now has to come up with a solution that suits them, depending on their very specific circumstances at their organisation.

There is no solution or way of doing things that everybody can do. Everybody is going to be slightly different, using different tools, different amounts of investment and different structures to figure this problem out.”

Earlier this year, a survey from Substantive Research found that there was still ‘major confusion’ on the buy-side around the anticipated impact of the SEC allowing its Mifid II ‘no-action’ letter around investment research to expire.

Undertaken six months before today’s expiry date, Substantive found that the buy-side were just as unprepared and ‘much less hopeful’ as they were when surveyed in August last year.

Read more: ‘Major confusion’ on buy-side as six-month SEC Mifid II ‘no-action’ letter deadline looms

“The lobbying effort that was undertaken since this was announced last summer – essentially that this letter would not be rolled and continued after 3 July – has been a roller coaster ride. There was hope that the SEC would indeed change its mind. However, the SEC’s been reasonably consistent in being quite sceptical about why they should do any sort of U-turn,” added Carrodus.

“The bill that is currently going through the House will not get through in time, and it is essentially instructing the SEC to give everybody six more months. That bill is, however, not in effect. Therefore, today we lapse.”

Impacts

Following the lapse of the letter, brokers in the US that are research driven, providing niche differentiated work to European asset management will be impacted, given that they don’t necessarily have the cost base to create a European entity in order to take the payments in cash in Europe. A solution that some bulge bracket firms have opted for. Such firms will either have to create new structures to take these payments or forego European revenues entirely.

European asset managers looking for diversity and greater competition in US broker research will also be impacted by the lapse. Such firms will now have a set of people they won’t be able to access because they won’t be able to pay them.

“It’s going to be a real challenge for firms and sell-side research providers in the US with European clients,” highlighted industry expert Sean Tuffy.

“Most groups relied on the ‘no-action’ relief to not do anything. It will be interesting to see how that shakes out. I would imagine that on day one, the amount of non-compliance will be near 100%. It’s more of a matter of how long it takes the industry to successfully move to a new model.”

What happens next?

With the SEC’s ‘no-action’ letter expiring, one thing for certain is that there is not a one-size-fits-all solution to compliance. Solutions will depend on who you are, where your offices are and where your clients are located.

“If you’re a bulge bracket, you’re probably gravitating towards taking payments in Europe from your European clients for research that’s also been produced in the States being consumed by your European clients. Essentially, you set up infrastructure, which means that you can now take the whole relationship through your European entity,” noted Carrodus.

“The other solution is that you bite the bullet as a broker and register as an investment advisor, allowing you take cash from anywhere, which can also provide flexibility. Another solution is that European asset managers create or increase their CSA programmes in the states to create a trading mechanism to pay for research stateside. There were a lot of hard dollar payments going on in the States, which I think was underappreciated and those people now have to look at solutions.”

The post Challenges for the buy-side and research providers become a reality as SEC allows ‘no-action’ research letter to lapse appeared first on The TRADE.