Implementation plans for next-day settlement of trades (T+1) in the US have moved up a few months to May 2024, consequently pushing testing timelines forward to mid-August of this year.
In most cases, financial institutions have completed a basic assessment of T+1 operational readiness needs. However, due to the scope and complexity of the impact across the trade lifecycle, higher granularity assessments are needed.
A deep dive into the metrics and activities of each business group is essential to ensure firm wide preparation and readiness for this historic shift. These details include, but are not limited to, fail rates due to varying situations, allocation rates, corporate actions, and more.
Due to the multifaceted nature of this industry change, there are still several questions unanswered. Accordingly, there are four key considerations when approaching complex T+1 initiatives.
Firms must update resilience plans and Service Level Agreements, and also consider how reduced time windows will allow for business continuity plans to be executed. This just cannot be a model that works on ‘sunny’ days. In March 2020, the industry saw record volumes – and any plan must hold up in that scenario, and worse.
Open questions:
New processes and behavior changes will be required to handle all allocations by 9 PM ET instead of the usual process happening post-market close. In addition, while there is a 9 PM deadline to complete all allocations, 7 PM is a better goal to properly allow for processing. To allow the allocations team to meet this goal, technology will need to be updated and CTM’s Match to Instruct should be considered as a means to automate the communication of allocations for maximum efficiency. This is where understanding metrics, such as when the majority of allocations are completed, will help better position firms to adapt.
Open questions:
The Canadian and Asian markets have aligned with the US for the initiation of T+1, but the rest of the world is planning to wait and watch. Firms undertaking the shift to T+1 need to introduce these changes without disruption to investors in different time zones. To do so, firms need to analyze their trade funding processes. This time zone disconnect will require vigilance from all parties to ensure funding is available when needed but there are several concerns that market participants will need to evaluate, such as rebalancing. Current processes related to T+1 settlement of certain securities should be referenced as potential models for expanding T+1 to other asset classes.
Open questions:
Reviewing the operational process and the reason for fails will guide market participants in understanding their gaps and closing them, via either automation or standardization. Creating a standardized practice and process to reconcile these fails will ensure that appropriate and timely action can be taken in these instances. These practices include ensuring that settlement instructions are correct, trade counterparty instructions exist, efficient firm communication is in place, and other preventative measures.
Simultaneously, firms need to be identifying areas of possible automation to flag and eliminate a majority of fails, especially since this impacts buy-side, sell-side, custodians, vendor participants, and more.
Open questions:
While the acceleration to a T+1 settlement cycle certainly presents many challenges, the long-term benefits and enhancements to the financial services industry, and reduced systemic risk for investors and financial institutions alike, outweigh the effort involved.
Is your firm prepared for the transition to a T+1 settlement cycle? Capco would welcome working with you to successfully meet deadlines and execute changes even in the most challenging situations in preparation for the testing requirements that will soon come into force.
For additional information, please see Shortening the US Equities Settlement Cycle | DTCC