As the financial industry turns its attention to preparing for the move to T+1 for US equities, firms are focusing on automating post-trade processes, an area that has traditionally received lesser focus than front office operational investment. In fact, according to a recent LinkedIn poll hosted by DTCC, the greatest number of respondents (43%) voted institutional “allocations and affirmations” as the process area that would require the greatest transformation to achieve the proposed settlement cycle timeframe.
The Securities & Exchange Commission (SEC) put a spotlight on the importance of institutional post-trade processing in the proposed rules issued on 9 February to shorten the settlement cycle to T+1 for securities transactions. The proposed rules will require institutional trades to be allocated, confirmed, and affirmed as soon as technologically practicable, and no later than end of trade date. During the SEC’s Open Hearing on the same date, the need to accelerate these activities was reinforced, receiving unanimous support from the Commissioners.
To efficiently clear and settle transactions, investment managers allocate block trades to underlying client accounts and instruct those details to the executing broker. Once the allocation process has been completed, the broker confirms each trade by providing a detailed record of a transaction, including what was traded, the date of the trade, the cost and the net value which is then affirmed by the investment manager or designated custodian or prime broker. By successfully completing these activities on trade date, matched and agreed transactions are submitted into the settlement process in time to meet the accelerated T+1 settlement timeframes.
At the hearing, Chair Gensler highlighted the importance of “affirmations, confirmations and allocations taking place as soon as technically practicable to ensure that settlement happens the next day”. Currently, most allocations occur post-market close, and the affirmation deadline is set at 11:30 AM ET on T+1. To make T+1 settlement a reality, the industry has proposed an affirmation cut-off of 9:00 PM ET on trade date, or T+0, enabling firms to achieve same day affirmation (SDA). The SEC also proposed multiple rule changes impacting broker dealers, registered investment advisors and central matching service providers to improve institutional straight through processing with the objective of achieving same day affirmation as a key enabler to T+1 settlement.
The good news for market participants is that automated solutions to help market participants achieve SDA currently exist. Simply switching from manual to automated processes for allocation, confirmation, and central matching significantly reduces the number of post-trade exceptions and costly reconciliation efforts. Trade affirmation and instruction for settlement can be fully automated when a centrally matched trade between an investment manager and executing broker occurs, eliminating the need for either party to take further action. According to Accelerating the U.S. Securities Settlement Cycle to T+1, a white paper by SIFMA, ICI and DTCC, firms using this optimised workflow are achieving a near 100% affirmation rate by 9 PM on trade date, demonstrating the tangible benefit of adopting automated post-trade solutions.
For many years, automating the allocation, confirmation and affirmation processes have been viewed as best practice but were not universally adopted. The market volatility of the past two years, created by the pandemic, meme stocks and world events, re-confirmed the importance of central trade matching and straight through processing. Now with the proposed move to T+1 in the US, post-trade automation is once again being thrust into the spotlight. As SEC Director of the division of trading and markets, Haoxiang Zhu referenced, “the Commission and market participants have long identified inefficiencies in the processing of institutional trades as the source of operational risks and a potential impediment to shortening the settlement cycle.”