It could not have gone much better than it did, considering the scope and impact the regulation had on the exchange-traded fund (ETF) marketplace. A move to T+1, and T+0 in some cases, was much different than the move from T+3 to T+2, or even T+5 to T+3. State Street benefited from the 2019 move from T+3 to T+2. We were able to lay the groundwork for the eventual move to T+1. Based on how an ETF functions across two marketplaces (primarily with the fund and secondarily on the exchange), there was always a benefit to offering a shortened settlement cycle to the standard US settlement cycle.

The shortened settlement optionality allows for more aggressive pricing of the ETF in the secondary market. When the US moved to T+2, State Street and the rest of the ETF industry was supporting T+1. Over the first 100 days, we have seen usage of the T+0 shortened settlement capability on a daily basis, but not the volume of T+1 shortened settlement orders we saw when the move to T+2 occurred. Part of that is how new the T+0 change is and firms testing that the capabilities work the way they were intended to work. I fully expect an increase in volume as we get towards the end of 2024.

The ETF marketplace was relatively well prepared to support the move to T+1. The ecosystem participants, including custodians, administrators, authorized participants, market makers and fund sponsors, spent the better part of a year working through what the move to T+1 meant to ETFs. There were a number of changes required to better support an ETF and allow for the same cost and operational efficiency that ETFs have become known for.

Whenever there are industry-wide changes, the challenges are usually around the unknown, which I would define as something no one thought about or knock-on impacts of changes that were not considered. In the end, the items that did arise were small and required more education and discussion to alleviate than systematic change.

State Street made technology changes across the ETF technology stack covering the lifecycle of the ETF. Starting with our primary market order taking platform, Fund Connect®, we extended order taking windows earlier in the business day as well as created intraday reporting capabilities to allow for T+0 settlement. Our ETF Global Platform is used to support basket production, security transfer instructions and reporting. We made changes to allow for intraday creation of transfer instructions to be released to the marketplace in support of the expedited settlement.

Lastly, we looked beyond what was needed to support the expedited settlement and made changes to the collateral processing used in ETF settlements. State Street added the ability to do same-day returns of collateral. This should provide savings to ecosystem members within the primary market settlement and benefit the underlying purchaser of the ETF. To date, we have seen a reduction in collateral held by about 24 percent. This should equate to savings down the value stream.

The modernization of the workflow allowed for more intraday capabilities, which we think is a need across the ETF industry with the proliferation of active management. The more accurate and timely data you have, the more opportunity a manager has to make decisions to the benefit of shareholders. This is part of the reason that we launched State Street Alpha®, our open architecture, cloud-native platform that includes integrations between back office, middle office and front office.

The goal for the ETF industry was to avoid operational inefficiencies which could lead to high costs and friction. If the industry did not come together to design and make the changes described, the ETF would still function. The ETF would just function less efficiently, and likely be more costly. That is the biggest benefit I have seen of the work that was done. ETFs have been taking an outsized portion of flows across both passive and active for years. The goal was not to disrupt that, and I think we successfully accomplished that.

Additional benefits we have seen over the first 100 days include a reduction in collateral as mentioned previously. There are a few things coming together on that reduction: Part is the same-day collateral return capability State Street rolled out. Another part is a reduction in fail rates from authorized participants (APs). At the same time, any use of a T+0 settlement would increase collateral on hand. If we strip out the T+0 settlements, the collateral savings are greater than the 24 percent mentioned.

Similarly in Europe, the transition went as well as could be expected due to the high focus across the industry, including cross-participant working groups, in advance of the change. If there was a negative consequence, it was to a subset of European-listed ETFs that have large US exposure.

Increased funding cost can occur at times for APs where the settlement cycle of the order has been reduced to match the US market, while the remainder of the fund exposures in Europe would be T+2.

The ETF marketplace is ahead of the baseline settlement timelines when we went beyond T+1 and created the capability to support T+0. From a legacy financial markets perspective, there is not much more room to reduce settlement.

I think where the conversation goes is to move processes that took place on legacy financial rails onto digital rails; more specifically, tokenization of assets and trading them on blockchains or other DLTs. There are teams of people inside of State Street and other ecosystem members working on tokenization efforts.