Home > Empowering Custodians & Broker Dealers: Strategies for a Seamless Transition to T+1 Settlement

Empowering Custodians & Broker Dealers: Strategies for a Seamless Transition to T+1 Settlement

With just over six months to go before the implementation of T+1, custodians and broker dealers play a critical role in guiding the industry through a seamless transition. It is important that custodians have the insights and strategies to effectively assist their buy-side clients in preparing for the implementation of the T+1 settlement cycle in the U.S., scheduled for May 28, 2024.
By Bob Stewart, DTCC Executive Director, Institutional Trade Processing
The transition to T+1 settlement will require firms to address challenges created by manual processes in the trade lifecycle, including processes around effective management of Standing Settlement Instructions (SSIs). Manual SSIs and the absence of storing and sharing SSI data in a standard and automated fashion across the industry introduce risks and inefficiencies into the post-trade process. In fact, we have seen that inaccurate or incomplete SSIs are often a primary reason for trade failures. These issues will likely become even more pronounced in a T+1 environment, where the shortened settlement cycle leaves little room for errors and delays.

The Role of Custodians & Brokers

Custodians can play a pivotal role in helping the industry prepare for the operational impact of T+1 by encouraging their clients to adopt automated SSI solutions. DTCC’s ALERT service is the industry’s largest online global database for the maintenance and communication of SSIs, with over 15 million SSIs, inclusive of three million cash SSIs, approximately 53% of which are maintained by golden source providers (e.g. custodians and prime brokers).

 

Custodians can leverage ALERT’s Global Custodian Direct (GCD) workflow to seamlessly input and maintain the SSIs of their buy-side client base in an electronic fashion, thereby, ensuring that SSI data is consistently accurate and up to date. With GCD, custodians truly become the owner and maintainer of their clients’ SSIs through machine-to-machine communication. By actively engaging with clients around the importance of accurate SSIs, custodians can foster an understanding and appreciation of the criticality of leveraging automated tools to enhance the accuracy and efficiency of trade settlement, reduce trade failure risks and optimize operational inefficiencies.

 
Broker dealers can also play a crucial role in increasing client automation in the post-trade ecosystem. Currently, smaller investment managers (IMs) often pass their manual SSIs to broker dealers, who then bear the responsibility of managing and maintaining them. This adds a layer of infrastructure support risk to broker dealers, who are looking to move away from manual, error-prone operational processes. Broker dealers and prime brokers can help in educating and encouraging smaller IMs to adopt automated SSI solutions like ALERT, to reduce their own risk profile, in addition to ensuring a cohesive and efficient approach throughout the industry as firms collectively ready for the move to T+1.

 

How ALERT is Continuing to Enhance the SSI Process

 

In its mission to streamline and enhance the post-trade process, DTCC introduced additional ALERT functionality, designed to bolster efficiency, accuracy, and reliability in trade settlements.

 

First, recognizing the challenges faced by late adopters of ALERT GCD, DTCC has developed a tool called Future Effective GCD for custodians to expedite the transition of SSI maintenance from buy side client to custodian utilising the GCD workflow.   No longer are the days of converting buy-side clients beginning at the end of the workday on Friday and into the weekend.  With Future Effective GCD, custodians can “stage” the conversion to GCD and effectively transition on a date in the future that is mutually agreeable to both them and their buy-side client. This functionality has already demonstrated remarkable success, enabling custodians to make significant strides transitioning SSI maintenance from buy side to the custodian.  For instance, one large custodian client, initially late in joining GCD, utilized the tool to onboard over 90% of their clients within a single year. This tool exemplifies the efficiency and adaptability that DTCC brings to the industry, ensuring that custodians, irrespective of their initial adoption stage, can effectively and efficiently support the transition that the industry needs to make towards an automated environment.

 

Second, the DTCC ASSIsT program provides investment managers and hedge funds, who currently share their SSIs manually with their brokers, the ability to leverage ALERT for the storage and electronic communication of SSIs thereby, reducing risk and creating efficiencies across the industry.  This service is at no-cost to investment managers and hedge funds, as it leverages the DTCC global service bureau to maintain SSIs within the ALERT platform on their behalf and does not provide access to the ALERT web user interface.  However, the value in eradicating a highly manual SSI process from a soon to be accelerating settlement cycle is enormous.  

 

Manual SSIs and manual operational errors are among the main reasons trades fail. With that being said, with the adoption of services like ALERT, and the use of Future Effective GCD and/or ALERT ASSIsT, these issues can be effectively addressed. These tools offer comprehensive solutions for automating and managing SSIs, reducing operational risks, and enhancing the efficiency and reliability of the post-trade process in the upcoming T+1 settlement environment.

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