SEC change of rules creates better risk management strategy for broker accounts

Earlier this year, the SEC (U.S Securities and Exchange Commission) published a press release regarding its intention for better risk management in clearance and settlement for broker accounts. Back in Q123, the SEC announced their plans to shorten the standard settlement cycle for most broker-deal transactions in securities. The change of rules has seen the cycle go from two business days (T+2) to one business day (T+1). The change of rules has been designed not only to benefit investors, but to also reduce the liquidity, credit and market risks associated with securities transactions.

What do the changes in rules mean for broker accounts and investment?

The final rules will improve the overall processing of institutional trades. The SEC goes on to explain that they will require broker accounts ‘to either enter into written agreements or create, enforce and maintain written policies and procedures that are designed to ensure the completion of allocations, confirmations and affirmations as soon as technologically practicable’ and no later than the end of trade date. For some securities transactions, investors will be required to establish and maintain records of their allocations, confirmations and affirmations.

In the words of the SEC, there will be a new requirement for firms to ‘facilitate straight-through processing’. This change requires certain types of clearing agencies that provide central matching services. In order to facilitate straight-through processing, central matching service providers will be required to design, implement, maintain and enforce new policies and procedures that meet SEC standards. The procedures will need to be submitted to the SEC in an annual report that both ‘describes and quantifies progress with respect to straight-through processing’.

Key takeaways for asset managers

The rule changes cast ripples throughout asset management impacting operations, risk management, and technological infrastructure. On an operational level, the shift from T+2 to T+1 demands heightened efficiency in trade life cycle management. This will in turn impact collateral management and demand faster granting times for the settlement and clearance of trades. Additionally, back-office functions like reconciliation and post trade reporting will feel the impact demanding agile frameworks to meet T+1 deadline whilst also control risk. In order to deliver on this timeline and ensure efficiency, firms will need to look at technology infrastructure and data management as being the foundational pillars in being able to do so.

The changes in rules will enable greater risk management

The SEC’s Chair Gary Gensler commented that he supports this change in rules as it reduces latency, promotes efficiency and greater liquidity in markets as well as improving overall risk management.

As always, the SEC’s intention and mission is to be able to protect investors and maintain fair, orderly and efficient markets. The changes in rules comes after the SEC published a staff report on ‘Equity and Options Market Structure Conditions in Early 2021’ which references the January 2021 trading activity of GameStop Corp (GME) and the famously cited “meme stocks.” The meme stocks raised many questions concerning the resiliency and efficiency of the US’s market structure for investors.

Following the initial publication of the press release, the final compliance date for the change of rules will be May 28, 2024.

Portfolio BI works with the most sophisticated buy-side firms and empowers them to take control of both their portfolio and operational data. We support portfolio management and will be working with broker accounts and investors to implement the changes in rules designed by the SEC. Creating a fair, just and orderly market is vital for risk management and operational resilience. If you would like to learn about how PBI can help you implement these new rules, contact us today.


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