In less than a year, the US equity markets are set to embark on a profound change to strengthen and modernize settlement cycles.

May 28, 2024 is what the SEC has set as the compliance day for T+1 settlements. “So what”, you ask? “Many other classes settle on T+1. Haven’t we seen this before?”

The simple answer is, yes. Markets globally have been adapting to the shorter settlement cycles for three decades. It was the early 1990s when equity markets made a bold move from T+5 to T+3 settlements. Back offices at US banks went into overdrive to ensure compliance with the new shortened settlement cycle. The move to T+2 in 2017 was also deemed a success.

Forward the clock to 2023 and it’s time to prepare for the continued evolution of the settlement cycle. Shorter equity settlement cycles bring unique challenges to market participants. No longer will financial firms throw bodies at the problem to meet the new demands of markets.

This time around, technology will be at the heart of the solution. And with only one day to settle trades, firms have little room for error.

T+1 settlements require firms to allocate trades as soon as technologically practical but no later than the end of the trading day, commonly referred to as “T”. The recommendation from the T1 Industry Working Group is to complete all allocations by 7 p.m. EST on the trade date to give firms sufficient time to complete the confirmation and affirmation by 9 p.m. EST. This is a significant adjustment from the current cutoff time of 11:30 a.m. EST on T+1.

The faster settlement cycle will require firms to integrate with and leverage various trade matching platforms. Firms must establish automated workflows instead of relying on email and faxes to adhere to the DTCC cutoff. Organizations will also need to evaluate their T-0 operational workflows and staffing models. Technology that facilitates matching, trade kick-out monitoring, and allocations will become the backbone of sound, fundamental operations.

Teams that are well-versed in technology, such as third-party operations, can provide increased hourly coverage to help limit the operational risk of failed trades and shorter turnaround times to resolve breaks with the street.

Optimizing Operations

Beyond the regular settlement of street-executed trades, prime brokers and alternate sec lending brokers also deliver and receive equities in high volumes, commonly to optimize financing costs, short borrow costs, and margin. Tightening market settlement cycles requires process workflow and technology changes to ensure brokers optimize positions while ensuring matching and market settlement. Firms should speak directly with their brokers to ensure they can accommodate any change in blotter timing/trade processing for both market and transfer trades.

Treasury functions for both asset managers and banks’ securities lending desks will also be impacted. An increase in settlement risk becomes a concern due to the shorter window to recall securities when lent out or to cover borrows in case of recall. The same will be applicable when securities are posted as collateral. The result will be increased efforts and time spent on day-to-day operations.

What does this mean for today’s asset managers? It’s time to review your tech stack and your processes.

The drive for more real- and near-time data on trades, positions, stock loan transactions, corporate actions, cash positions, and margin requirements is going to increase. Intra-day affirmations will become increasingly prevalent. As a result, today’s manual reconciliation processes will not be able to keep up with accelerated settlement cycles. CTOs, head of operations, risk managers, treasurers, and more must carefully evaluate their existing infrastructure and operations to assess if their processes are up to the new regulatory demands.

With less than 12 months to get this right, now is the time to map out your tech stack transformation. You’ll also want to get budgets in place and begin project management to meet this quickly approaching deadline.

Ted O’Connor, Senior Vice President, Business Development
Dirk Fole, Senior Vice President, Global Co-Head of Financial Operations

Arcesium has years of experience helping firms transform their tech stack. Contact us to learn how our sophisticated tools can help you prepare for the quickly approaching changes in settlement cycles.

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