T+1 War Rooms – North America: Is it time to hone in on individual counterparties?

One month in, it is still difficult to pinpoint any major issues or changes stemming from the shortened settlement cycle. Instead, attention may turn to individual counterparty monitoring to highlight any laggards.

By Jonathan Watkins

Three weeks into T+1 settlement in the US and the positive feedback has been resounding due to the efforts of the industry in the build-up to the seismic market structure change.

According to data drawn from participants in our War Rooms initiative, nobody has reported any areas – affirmations, FX, funding gaps, securities lending recalls, manual exception handling and fail rates – as performing worse than expected. Instead, many of these areas have surpassed expectations, with some seeing fail rates improve on those seen in a T+2 environment.

While the success may not provide the eye-catching headlines we anticipated, the accomplishment itself has become the story.

However, the industry is still looking at the 1% of outliers and how those issues or specific counterparties can meet the standards set by the other 99% of the industry.

Part of this effort may come down to individual counterparty monitoring and calling out brokers, custodians or segments of the market which are lacking in affirmation, matching or timeliness.

Multiple buy-side voices have said they are doing so, some continuing the process they have always done just with more focus, and others having the

“We’re definitely looking – as a start – by broker,” said one asset manager. Another noted: “Obviously, there’s additional attention just to make sure that everything is aligned, but we just basically rolled it into our ongoing reviews of how we are performing. It’s not just counterparties, but it’s specific markets, specific vehicles, counterparties and custodians – we look at it in four degrees.”

During a roundtable from our first week of War Rooms, one asset manager said: “We had a 96% affirmation rate, but there was only one errant broker who was consistently not affirming their trades. And right up until Friday that was the case. But I do think it was largely to do with the fact we threatened to stop trading with them if they didn’t comply, which they promptly did comply. That could be an area where it comes back over time if those people don’t keep that hyper care focus to it.”

Another speaker added: “Look, there’s a couple of counterparties that aren’t on CTM that aren’t building or billing the confirmations in time for affirmation. So that’s been more kind of targeting those smaller counterparties to say ‘look, when are you going to be ready?’”

This is very much an industry now striving for perfection, after probably factoring in that there would be more issues in the transition than there has been.

One speaker noted that while a handful of metrics have been published, there are about 40 other metrics which have not been made public which are either at par to where they were prior to the conversion or better. Data is still likely to come out from adjacent sectors in the coming weeks or months which could have different results by region or function, but for now the industry is still commending its work in the build-up to 28 May and the hyper focus in the opening weeks.

“The industry effort on this speaks for itself,” said one of the world’s largest asset managers.

Michele Pitts, global head of custody data, securities services, Citi, added: “We haven’t seen any specific issues and we are still tracking and monitoring late instructions sent by clients.   I will say that our volumes pre 09:00 p.m. deadline were much higher than what we had anticipated because of this so that’s been a pleasant surprise. Our affirmation rate has been higher as well.

“We have not seen a significant spike in extended settlements and things are much more seamless than expected. We’re not seeing any knockdown issues in funding or FX. So it’s almost as if everyone was perfectly aligned for go live…and our overdrafts, pre and post, are at similar levels to pre T+1.”

One interesting soundbite from the discussion – which took place just over two weeks after the switch to T+1 – was that one specific custodian had reached out to a buy-sides organisation to state that they would be passing down the entire penalty clause for unaffirmed trades to the client.

The custodian was not named, but the panel seemed bemused by the concept.

“I haven’t heard that from any of the others, but that’s something that we saw coming from one custodian. And we’re trying to understand: how do they track it? That part that’s still not clear.”

Another speaker who found the notion fascinating said: “I think it was anecdotally bounded around that it would be passed through. But to your point, there’s the concept and then there’s the practicality of the actual calculation? If you’re going to pass something through, then the numbers need to reconcile. It needs to be calculated on the same basis.”