T+1: To Work Smart, Work As a Team
May 7, 2024
Read Time: 6 minutes
Regulation
In May of 2024, the U.S. and Canada transitioned to the T+1 settlement system for transactions in U.S. equities unit investment trusts, and corporate debt. This historic change promises to improve overall trading efficiency and aligns with global trends.
With the shift to T+1, U.S. equities traders have a much shorter window to complete post trade processing before the settlement cycle begins. In addition, trade allocations shift forward to 7:00 p.m. ET on the trade date, with a 9 p.m. trade date cutoff for affirmations.
The T+1 settlement represents the future of securities trading, offering market participants reduced risk exposure, increased capital efficiency, and heightened liquidity management capabilities.
This significant transition was driven by technology advancements, regulatory imperatives, and industry-wide efforts to optimize operational infrastructure. Industry participants have to rethink their trading strategies, implement strong risk management practices, and utilize modern solutions to navigate through the possible complexities.
Challenges may include:
Additional challenges could include: increased likelihood of settlement failure, time-zone differences, and possible effects on stock lending and borrowing.
To achieve compliance and operational efficiency, the T+1 transition requires detailed planning, substantial technological investments and an agile financial operations team that can deftly navigate these crucial shifts. Evaluating current processes thoroughly guarantees successful systems changes, and can be further validated through third-party resiliency testing.
There are many misconceptions with the T+1 transition. For example, midsize and boutique sized firms most likely might feel left behind unless they collaborate with sophisticated outsourcing partners. Some non-U.S. firms mistakenly think they are exempt from T+1, while others assume their custodians will manage everything, overlooking their limitations.
RELATED READING: Implications of T+1: Assessing Your Firm’s Readiness
For asset managers, the reforms have brought new headaches for their in-house operations teams. While large firms may have already upgraded their operational systems to handle the huge amount of data that will have to be digested, implications for smaller to midsized firms are clear. Many large firms will have upgraded their systems to manage the influx of data, but smaller to mid-size firms face unique challenges such as shorter settlement windows that gives less time to process trades. This challenge depends directly on the specific strategy the investment firm adopts, but for daily traders it translates into higher trading volumes, additional headcount, and increased traffic. This will vary depending on the investment strategy a firm follows, but for those funds trading heavily on a daily basis, it means higher trading volumes and, potentially, more investment into in-house teams to handle increased traffic.
For firms with global operations teams, the T+1 deadlines may be bringing more distinct challenges. Varying time zones further reduce time windows for completing settlement, straining teams who work across markets. Operations that follow, or adapt to, a “follow the sun”2 model are better able to maintain efficient settlement across jurisdictions.
Maintaining that global efficiency is crucial to the success of any operations team, as missing deadlines multiplies the amount of work required. While missing a deadline does not incur regulatory penalties, it does trigger additional processes and disclosures. These additional steps are often manual, or semi-automated at best, and prevent the straight-through-processing (STP) that reduces costs and enables efficiency3.
While in the process of recalibrating their operations and technology to alleviate the challenges of T+1, firms should also assess whether certain activities need to be moved to either earlier in the day, or even to trade date. In addition, firms should consider reviewing team experience and team availability, to ensure the right people are in place at the right time
Aligning with an appropriate partner can provide comprehensive support across the accelerated settlement cycle and is paramount to a successful solution. A strong strategic partner will have knowledge and expertise in several areas:
Best practices across process, people, and technology to help navigate the challenges associated with a faster settlement cycle.
Sophisticated technology with the scale and agility to accommodate required efficiencies for T+1 settlement.
An operating model that can accommodate rapid transaction processing and high volumes of data flow, capable of handling increased workloads and tighter deadlines.
Operating hours should be extended as needed for applicable markets, ensuring operational coverage for trade processing and settlement within appropriate timeframes.
Given that much of T+1 compliance is dependent on reliable technology, firms should have robust continuity planning in the event of any system failure. Distributing responsibilities and process across teams, regions, and platforms further de-centralizes this type of risk.
The settlement chain has many components, including counterparties and outsourced partners, so firms should conduct regular evaluations of the efficacy of each party. While outsourcing may be the most effective option in terms of operational scale in the face of the new regulation, asset managers still need to retain oversight to enforce an orderly process.
As stakeholders continue to adapt to the accelerated settlement cycle, they may have to recalibrate their trading strategies, adopt vigorous risk management practices, and leverage innovative solutions to navigate the complexities inherent in the switch to T+1.
From a project management perspective, firms must focus on covering technology, regulation, and communications. It’s imperative to go through documentation and make the appropriate language changes to reflect the T+1 move. The transition may also require substantially more investment in technology and automation enhancements than was needed during the adoption of T+2 in 2017.
While some firms have been improving their in-house technology systems, others have chosen to leverage existing industry solutions to assist with trade matching, affirmation, delivery, and performance benchmarking.
Arcesium has years of experience helping firms transform their tech stacks. Our Managed Services teams are positioned globally to support your firm’s activities wherever trading occurs. Our commitment to technology modernization and operational excellence ensures that your firm benefits from cutting-edge solutions tailored to your unique needs. We seamlessly integrate advanced technologies, optimize workflows, and provide round-the-clock support to meet the T+1 settlement requirements. With Arcesium, you can focus on your core competencies while we handle the complexities of your tech infrastructure, driving your business forward in an ever-evolving market.
Sources:
Share This post
No spam. Just the latest releases and tips, interesting articles, and exclusive interviews in your inbox every week.
No spam. Just the latest releases and tips, interesting articles, and exclusive interviews in your inbox every week.
