The US’ upcoming move to T+1 will deliver many benefits to the financial services industry, including reduced risk of trade fails or delays, lowered clearing fund requirements, improved capital and liquidity utilisation, and increased operational efficiency. As we work towards a successful implementation, it is important to understand that T+1 will impact every function in the post-trade ecosystem, and that its benefits can only be reaped if market participants are well prepared for the May 28, 2024 compliance date.
First, due to the number and magnitude of changes that will be required to achieve a T+1 settlement cycle, it is critical that firms conduct a comprehensive and well-coordinated industry test to ensure readiness and a successful implementation. This includes end-to-end testing from trade execution to trade settlement, involving Institutional Trade Processing (ITP), National Securities Clearing Corporation (NSCC) and Depository Trust Company (DTC) as well as other relevant market infrastructures.
Firms should consider the various processes and systems impacted by the T+1 functional changes at their firms and determine their own scope of testing, with the scenarios as a guideline for each firm’s unique circumstances.
At the same time, firms should also perform end to end testing of their post trade process for non-standard settlement, including production holiday processing, corporate actions (for example, stock splits and tender offers) and double-settlement days.
Second, it is crucial for market participants to understand what is required of them to comply with the accelerated settlement timeframe, including whether there are any unique US post-trade processes that must be understood and addressed. Specifically, trade affirmation, which enables institutions to affirm broker confirmations, is a critical and unique step in successful trade processing in the US Here, the executing broker submits a trade confirmation, with either the investment manager or its custodian affirming the trade. Within the T+1 settlement cycle, this process will need to be completed by 9pm ET. The good news is, central matching solutions that enrich trade details with standing settlement instructions and enable same-day affirmation are available and are key enablers to achieving an accelerated post-trade flow.
On the DTCC side, we’ve seen a noticeable trend on the buy-side where significant portions of allocations are being submitted after the US close and concentrated in a 2-hour window. With the move to T+1, firms will have to allocate, confirm and affirm institutional transactions by 9pm ET on trade date. The new compressed timeframe will result in a very small window of time to handle and resolve exceptions. Historically, there was a direct 1:1 correlation between orders at the execution level and the blocks submitted for central matching. However, there has been a move away from this practice over time and buy-side firms frequently block multiple orders prior to submission. While we recognise that there are valid business reasons for this practice in many cases (e.g. avg. pricing), it is recommended that wherever feasible firms move back to an intraday allocation model for a smoother transition to T+1 settlement.
There are many buy-side firms, particularly smaller asset managers, that are expecting either their broker dealers or custodian banks to ensure their readiness with T+1. While the sell-side is generally further ahead in their T+1 preparations, there are certain activities as a result of the new rules that investment managers will need to perform in the US that cannot be covered by the sell-side. These activities include an investment management record keeping obligation, which not only requires Registered Investment Advisers to record their transactions but also to retain and archive them. For broker dealers, over time, there may also be a requirement to provide the SEC with evidence that they and their counterparties are meeting the T+1 timeframe. Should the SEC examine this area, broker dealer policies will need to be reviewed to ensure they are robust and fit for purpose.
Third, firms should assess how operationally efficient they are and how efficient their counterparties are. While there may not be penalties for counterparties that fail to settle on time within current broker dealer policies and procedures, this may change for clients who persistently fail to meet deadlines. Longer term, broker dealers may calculate the cost associated with late settlement and potentially pass this on to their clients.
The same holds true for custodian banks, there currently does not seem to be plans to pass on fees to asset managers for post trade inefficiency, including around the timeliness of allocations. However, for clients that do not hit the night cycle and need to process transactions in the more costly day cycle to meet T+1 settlement, there is a higher cost for custodians. Over time, that could result in asset managers being charged more to cover the higher rate of day cycle trades.
For firms to understand how they are performing operationally, as well as their counterparties, organisations should consider solutions that provide insights into operational performance. These solutions, which are already available, can provide a wealth of metrics on same day agreement, same day entry, submission time confirmation and affirmation rates against custodian cut-off times. Firms can leverage this operational data to evaluate which counterparties are performing better than others, allowing them to produce a trade processing score card for each counterparty to identify any who are consistently operationally inefficient.
Given the number of post trade functions that are impacted by T+1, market participants need to have started their preparations for the implementation. Key actions include, understanding which functions are impacted, how they will be impacted, operational and counterparty performance and the role that post-trade automation and operational data can play in improving the efficiency of post trade processing. T+1 implementation is less than ten months away – the time to act is now.