T+2: Judgement day

Ryan Burns, head of North America relationship management at Northern Trust Global Fund Services, discusses the potential opportunities of T+2.

A regulatory deadline can act like a tsunami. Starting far off in the distance, almost imperceptible from normal water, the wave sprawls, getting larger and larger as it slowly moves toward land. But even as it approaches, it can be hard to predict if a wave will cause widespread destruction or simply lap upon the shore.

So it was with T+2. The Shortened Settlement Cycle Industry Steering Committee was formed way back in 2014 to explore how to facilitate the US settlement cycle and released a timeline that proposed moving to T+2 by the third quarter of 2017. Industry requirements around trade processing, asset servicing, documentation and regulatory changes were outlined. Consultants warned the industry was unprepared even as the SEC moved to finalise the implementation date earlier this year. Conferences were held, white papers were written and webinars hosted. And then, T+2 arrived with barely a ripple: the US market had successfully executed a shortened settlement cycle.

What made this transition so smooth? And how can the industry repeat its T+2 success with future regulatory changes?

Emphasise the opportunity. T+2 presented many potential opportunities for fund managers. A shorter settlement cycle limits daily exposure to counterparties, ensures cash is in the portfolio more quickly and may increase investment opportunities. Discussing these benefits with participants allowed for a greater picture of rationale behind T+2, making it more than just a burden for people to implement.

Take advantage of the shift. T+2 was a chance for firms to look at their procedures, systems and technology infrastructures to identify opportunities for more efficient trading. It was a chance for many firms to ‘look under the hood’ of operations and take advantage of the process for comprehensive changes in approach.

Engage in a dialogue. Industry-wide change offers a chance to learn from others. I spoke with a number of clients in the lead-up to T+2 implementation, discussing how the change will impact operational interaction with their counterparties and Northern Trust. We worked with clients to make enhancements to trade communications, cash reporting and reconciliation processes. We did this across the fund custody and accounting environments, particularly from a liquidity standpoint. Our clients were able to take advantage of the larger conversations to do things wiser, smarter or quicker than they might have been able to do on their own.

“Never let a good crisis go to waste,” Winston Churchill famously said. A regulatory change isn’t necessarily a crisis, but it certainly is an opportunity that smart firms don’t let pass by. With preparation and strategic planning, financial firms can ride the waves of regulatory change and emerge better prepared to capture the opportunities created by developments that are sure to come.