It’s easy to get consumed with the challenges of T+1, but what are the benefits of the accelerated settlement that we need to remember?
DTCC has long advocated for a shorter securities settlement cycle to enhance market resilience, reduce margin requirements and lower costs for investors. Back in February 2021, we published a white paper to the industry on T+1 including risk model simulation results that showed a potential 41% reduction in volatility margin requirements by taking that one day out of the settlement cycle. Ultimately, the less time a trade is open in the market, the less risk there is of failure.
To achieve T+1 readiness, firms are going to have to evaluate their processes, controls and technologies and implement solutions and adjust operational processes to gain efficiency in the US market. It’s now about doing the required due diligence as an industry, to reap those benefits. Keeping in mind that some of those learnings and efficiencies will be able to be carried forward to other markets that are also considering T+1 in the future.
What role is the DTCC playing in the transition?
As the industry-owned and -governed provider of the primary clearing and settlement agency for US equities and equities affiliated securities, we have a responsibility to help de-risk the market when it comes to US clearance and settlement. We also have a deep history of helping the market shorten the settlement cycle – from T+5 to T+3, and T+3 to T+2.
DTCC is currently partnered with the Securities Industry and Financial Markets Association (SIFMA) and the Investment Company Institute (ICI) on efforts to accelerate the US securities settlement cycle from T+2 to T+1. We recently published a T+1 Playbook, T+1 Test Approach, and other updated T+1 documentation to provide impacted market participants with a detailed approach to identifying the potential impacts, implementation activities, timelines, dependencies, and risk impacts that market participants should consider in order to successfully prepare for the transition to a T+1 Settlement Cycle on 28 May 2024.
We understand that you can’t just snap your fingers and be T+1 ready. The roadmap explains the steps that need to be taken to plan and accelerate. The key lessons we’ve taken from our previous experiences shortening the settlement cycle focus on the program planning and execution processes, because it’s not just about changing the timing of files, it’s about everything that leads to that and the securities trade cycle itself.
The ValueExchange report flagged up a lot of challenges that all types of organisations are facing – do you think it’s positive that there is that awareness of the challenges out there?
Yes, we are encouraged by the high levels of industry awareness because you can’t fix what you don’t know. The ValueExchange survey and subsequent report did a great job in highlighting how the firms situated further from the core US markets are those further away from an awareness standpoint.
Whether it be the affirmation process or FX, it’s important to highlight issues around preparedness and awareness globally, and that’s what we’ve tried to do, both with the survey and in the virtual T+1 event series that we continue to host.
It’s clear that this isn’t just a US challenge, but is it as simple as ‘the further away you get from North America – the bigger the challenge’?
The further east you go and the less time you have from a time zone perspective, the less time you have to resolve the issues, which could be FX or it could be lending related for example – two key areas of concern for firms in the lead up to T+1.
If you’re in Tokyo at the start of your business day T+1, you have two hours to reconcile any issues that you had for your US equity flows. That’s just two hours to analyse and correct the data: are there any exceptions on the trade itself? Was the trade out on loan? Are there FX implications?
We believe that education around these global impacts is key, where there’s accountability for the change and the knock-on effect.
If there is one message you could print onto a billboard for the whole industry to see, what would it be?
It would be around automation, reviewing your processes now and understanding how you can get more into the pipe earlier in the day to achieve T+1 settlement. Historically – and certainly right now with existing market conditions – there tends to be a spike of activity around market close, so the more firms can get into the pipe earlier, the less pressure there is on those end of day processes – whether it be lending, FX or reconciling differences in those trades.
Starting preparations for T+1 compliance earlier means there’s more time for counterparties, brokers, and custodian to resolve issues. It’s not always feasible, but it’s something that we recommend firms consider in their preparations.
Sticking with that billboard analogy, would there be different messages for different types of participants?
For the buy-side it would be: start on your T+1 impact assessments now if you have not done so already. If you have not completed your impact assessment by now, you are already late. Get started today.
For brokers and custodians: start to evaluate how counterparty behaviour is impacting processes. Investigate areas of in-efficiencies: are they instructing you through e-mail? If so, is that viable in the future? What are the tools available for those firms and helping educate them on the benefits to both sides in using them. Those would be the billboard messages.
While a lot of the answers to the challenges ahead lie outside of DTCC’s remit, what are you offering to the industry to help with this readiness?
Our suite of Institutional Trade Processing (ITP) services support automation and straight through processing. Ahead of T+1, we consolidated our matching platforms into one global, central matching platform and modernised a lot of our infrastructure in preparation for a more efficient workflow to achieve STP, which is foundational to T+1.
To accelerate settlement, post-trade allocation, confirmation, and affirmation need to happen faster. ITP services enable operational efficiency to meet T+1 by providing central matching of cross-border and domestic trades via CTM®, with workflows that automatically trigger trade affirmation and delivery of DTC-eligible securities directly to the DTC for settlement when a trade match between an investment manager and executing broker occurs, taking steps out of the process. These services also enable automatic trade enrichment with golden-sourced data from ALERT® and the tracking of settlement statuses, allowing for seamless connectivity through the settlement lifecycle to reach settlement finality. We have also begun offering ITP Data Analytics to help clients leverage their own ITP data to identify areas of remediation and improvement their overall securities processes.
We also realise that many clients might not have the subject matter expertise or the resourcing to conduct a comprehensive impact analysis or execute on all the projects required to be ready by May 2024, and that’s where DTCC Consulting Services comes in. Our experts bring deep industry experience and decades of post-trade knowledge to support firms along every step of their T+1 readiness journey from impact analysis to project design and execution all the way through post-implementation remediation.
How does the DTCC feel about the implementation date given by the SEC?
We were prepared for a March date, we were prepared for a September date, and we will be equally prepared for a May date.
Accelerating the settlement cycle to T+1 will bring many benefits, including reduced risk, lowered clearing fund requirements, improved capital and liquidity utilisation and increased operational efficiency. At the same time, we recognise that significant challenges remain towards implementation and will continue to partner closely with market participants, as well as regulators, SIFMA and the ICI, to promote a successful transition to T+1 and to safeguard the stability of the markets.