On May 28, 2024, the U.S. — the world’s largest financial market — will transition to a T+1 settlement system for transactions in U.S. equities, unit investment trusts, and corporate debt. The move promises to enhance overall trading efficiency and aligns with global trends. Canada will adopt the T+1 system a day earlier.

By shortening the settlement cycle to T+1, market participants trading U.S. equities will have much less time between trading and the start of the settlement cycle to perform post-trade processing. Following the introduction of T+1, trade allocations will be brought forward to 7 p.m. ET on trade date, with a 9 p.m. trade date cut-off for affirmations.

The move to T+1 settlement marks a significant evolution in securities trading — streamlining processes and driving efficiencies within the financial landscape. With the new settlement cycle, market participants are poised to experience reduced risk exposure, increased capital efficiency, and heightened liquidity management capabilities.

Modernization opportunities and challenges

The transition represents a pivotal moment in the modernization of the U.S. financial infrastructure, driven by technology advancements, regulatory imperatives, and industry-wide efforts to optimize operational infrastructure. Stakeholders will be compelled to recalibrate their trading strategies, adopt robust risk management practices, and leverage innovative solutions to navigate the complexities inherent in the transition.

The transition may pose challenges for firms in the following areas:

  • Operational adjustments
    Firms will be compelled to upgrade transaction processing systems for quicker settlement, bringing increased operational costs.
  • Liquidity management
    A faster settlement cycle requires adjustments in liquidity management to ensure availability of funds, potentially complicating cash flow management.
  • Compliance and risk management
    Adjustments to compliance frameworks and risk management practices will align with new regulations and help manage reduced timeframes for risk identification.
  • Technology and data infrastructure
    Data processing and cybersecurity measures will require enhancements to handle increased data volumes and protect against heightened cyber risks.
  • Cross-border transactions
    Aligning operations with global markets that have not yet adopted T+1 creates additional challenges for firms with global operations.
  • Human capital
    Employees will require training to adapt to new systems and processes crucial for a smooth transition to T+1.

Additional challenges to keep in mind include increased likelihood of settlement failure, time-zone challenges, and the impact on stock lending and borrowing.

Financial operations agility

Overall, the shift to T+1 requires comprehensive planning, significant technology investments, and a financial operations team agile enough to navigate operational and strategic shifts while ensuring compliance and operational efficiency. Review of existing processes will ensure systems can handle any changes, supported by checks on interconnectedness with third parties and adequate resiliency testing.

Technologically advanced firms — especially in the U.S. — are likely well prepared to meet the transition, but many midsized and boutique size investment managers may suffer acute challenges unless they quickly develop relationships with sophisticated outsourcing partners. Some non-U.S. firms believe they are not affected because the T+1 transition is an SEC rule, and as such assume it does not apply to them. Others simply think their custodians will handle everything for them, but providers can only do so much.

RELATED READING: Implications of T+1: Assessing Your Firm’s Readiness

Operational challenges

The reforms pose significant challenges to in-house operations teams at asset managers. 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. Shorter timescales lead to more work for teams, cutting down the amount of time they will have to deal with trades. 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.

Ensuring T+1 readiness

Asset managers can take these steps to ensure readiness for T+1:

  • Ensure compliance-related processes required to finalize trade allocation are in place earlier
  • Review timing of trade delivery to fund administrators, custodians, middle-office providers, and evaluate timely communications to ensure trades are matched on trade day
  • Automate any manual pre- and post-trade processes that may delay T+1 settlement
  • Communicate corrections or changes in trade allocations to appropriate stakeholders in a timely manner
  • Thoroughly assess lending practices and review contract terms
  • Review account opening procedures to ensure all market participants are prepared
  • Assess reconciliation workflow associated with any corporate action-related workflow
  • Be aware that trades affirmed after 9 p.m. ET are more costly and more operationally intensive1
  • Make sure FX transactions executed for repatriations for U.S. trade settlements, dividend, or other income coincide with T+1 settlement
  • Extend team coverage to resolve exceptions or consider outsourcing post-trade processes

Global firms face even greater challenges

The new deadlines may create more pronounced issues for firms with global operations teams. Unless they have “follow the sun2” operations, T+1 will put additional strains on teams as they try to accommodate the reduced timeframes across different time zones.

While there will be no regulatory penalties in place if deadlines are missed3, missing a deadline will trigger semi-automated, or even manual, processes and will hinder straight-through-processing (STP). This, in turn, will increase costs and exacerbate any existing inefficiencies in processes.

While in the process of recalibrating their operations and technology in advance of T+1, firms should also assess whether certain activities need to be moved to either earlier in the day, or T+1, or even 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.

Meeting evolving future requirements

Aligning with an appropriate partner can provide comprehensive support across the arc of the T+1 transition and is paramount to a successful transition. A strong strategic partner will have knowledge and expertise in several areas:

  • Global expertise and best practices
    Best practices to help navigate the challenges associated with a faster settlement cycle.
  • Advanced technological solutions
    Sophisticated technology solutions essential in managing the increased speed and efficiency required for T+1 settlement.
  • Operational support
    The ability to support processing transactions, which will help manage increased workload and tighter deadlines.
  • Extended window of operations
    Extended operating hours for processing and settling trades, ensuring all transactions are completed within the required timeframe.
  • Risk diversification
    Risk mitigation of system failure or other disruptions that may affect the ability to meet T+1 deadlines by distributing settlement processes across different locations and systems.
  • Regulatory compliance
    The ability to navigate differing regulations in different jurisdictions around the globe.

Outsourcing may be the best option for many firms to avoid falling afoul of the new regulations. Any firm will only be as strong as the weakest link in its entire settlement chain, and so asset managers using counterparties need to do a thorough assessment and make sure they are prepared.

Recalibrate to leverage innovative solutions

As stakeholders adapt to the accelerated settlement cycle, they will 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 ahead of T+1.

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 innovation and excellence positions us as an essential partner in the  transition to T+1, ensuring our clients a seamless adaptation and contributing to the resilience of global financial markets.

Author: 
Ted O’Connor
Ted is a Senior Vice President focused on Business Development at Arcesium.  In this role, Ted works with leading financial institutions in the capital markets to optimize data, technology and operational needs.

Sources:
1 Trade Affirmations: Key Questions Answered as T+1 Approaches, DTCC, April 23, 2024
2 What is the follow-the-sun model? Advantages + strategy, Zendesk, December 7,
3 The Road to U.S. T+1 Settlement, DTCC, May 30, 2023

 

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