Danny Green, Head of International Post-Trade, Broadridge
As we should all know by now, the Securities and Exchange Commission (SEC) has adopted the rule to shorten the settlement cycle to T+1, effective from 28 May 2024 for most US securities transactions that settle through the Depository Trust & Clearing Corporation (DTCC).
In synch with the US, the Canadian Capital Markets Association (CCMA) will transition to T+1 a day earlier, on Monday 27 May.
This shift to a shorter settlement cycle represents a critical step for the financial services industry at a time when underlying market change is accelerating at pace. The implications of T+1 in North America, will however be more far reaching, impacting the cross-border markets for all regions where North American settlement is required. It’s a timely move, in more ways than one – and firms should be approaching it with a real sense of urgency. For many firms, the trade life cycle needs to be simplified to enable a more efficient and streamlined approach. In a T+1 scenario the industry cannot afford to be solving problems 24 hours later; they should be looking at how to solve them in the trade support areas of operations and technology.
Regulatory compliance will drive market participants to become more efficient. There is a need to become better, by reducing process friction, minimising failure rates and resolution times – in the knowledge that non-compliance is not an option.
T+1 does in fact offer a golden opportunity to bolster post-trade processing capabilities to achieve long-term operational efficiencies. Forward-thinking firms can use T+1 compliance as a driver for real top and bottom-line growth, and lay firm foundations for the inevitable future shortening of the settlement cycle to T+0.
However, there is much to be done. The compression of the settlement cycle to 24 hours will also create significant challenges, like operational adjustments for market participants to ensure trade matching and settlement can be achieved within a shortened timeframe, and new costs, such as the necessary investment in technology and infrastructure upgrades.
A development that affects us all – and on a global scale
Sell-side firms need to quickly understand the behavioral, structural, operational, and technological change costs associated with executing a T+1 strategy. In a T+1 setting, the previous strategy of simply throwing additional manual resources at functions will become problematic. Firms will not have the time needed to execute essential functions manually, and will become far more reliant on technology to meet deadlines and demands.
And as the clock counts down, buy-side firms must also complete an impact assessment on the implications of T+1 across the trade cycle and identify the changes they need to make to their technology, operations, and control processes.
With the go-live date fast approaching, brokers and buy-side organisations are hurrying to complete a daunting schedule of planning, testing, and implementation.
There is no universal playbook on how to assemble new processes and technologies into an infrastructure, and a governance structure, for next-day settlement. Every firm must chart its own unique course, identifying the required changes for current procedures and finding effective solutions.
With North America firmly on track for T+1, the global industry is feeling the pressure to follow suit. For example, the UK task force is set to issue its findings ahead of a final market directive planned for December 2024. European fund managers, meanwhile, are frantically urging European regulators to mirror the move to T+1, warning of a “major and serious risk” to the continent’s capital markets if regulators don’t copy the US and Canada and cut settlement cycles to one day.
The convergence of collaboration and technology
Fortunately, innovations in technology, such as robotic process automation (RPA), AI, and enhanced data exchange are driving new solutions that help firms better automate their processes. The innovations promote Straight-Through Processing (STP), more efficient workflows that reduce fragmentation, and enhanced reconciliation. Much of this game-changing technology didn’t exist or wasn’t widely available during the T+2 transition.
These solutions, now widely available from a growing number of fintech providers, can help the industry address inefficiencies and prepare for T+1, and ultimately T+0, embedding operational excellence as a core competency. Firms can smooth out this important transition by finding the right partner to help them create effective technological solutions suited to their specific circumstances. At Broadridge, we’ve studied the implications of T+1 carefully and are confident our systems will be ready. We’ve emphasised education, running a series of consultations with our community to aid readiness.
As we collectively prepare for T+1, the industry has an exciting opportunity to future-proof itself and address the challenges of an eventual move to same-day or real-time settlements.