Preparing for T+1 settlement
Time is of the essence
Capital markets across the globe are gearing up for a seismic change in post-trade settlement as US securities markets transition to a shortened T+1 settlement window. The new settlement rules are fast approaching - they become effective on 28 May 2024.
T+1 settlement means that securities settlements must be completed within one day of the transaction date. All financial firms who participate in or facilitate the trading of US-listed securities, irrespective of global location, must comply with this accelerated trade settlement rule when it goes live. This poses significant financial and structural challenges for in-scope financial firms.
The new US trade settlement period is set to have a huge impact on global capital markets, with banks, buyside firms, vendors and counterparties in the US and abroad affected. One impact felt by all in-scope firms is the significant overhaul required of existing technology infrastructure, potentially incurring high up-front costs. According to one recent report, the T+1 transition could cost firms trading, or providing custody services for, US equities between USD6 and USD10 million over the coming years.
In-depth reviews of technology infrastructure, if they are not already in progress, are necessary in order to identify gaps and inefficiencies. All aspects of the trade life cycle, including communications, connectivity, execution, operations, settlement, clearing and reconciliation will need to be re-optimised. Many firms are likely to embrace automation to achieve this objective. The use of APIs and cloud technologies to facilitate straight-through processing and reduce reliance on manual trade management workflows and legacy infrastructures is a likely outcome.
Infrastructure must be resilient enough to withstand the processing of high transaction volumes in a shortened settlement period, yet still maintain operational integrity and security. Granular monitoring will be needed to iron out issues in the new architectures. Ideally, a holistic overview of each stage of the settlement process across different asset classes is required to identify bottlenecks and keep track of all trade executions and failures passing through the system.
The transition to the new settlement period has given in-scope firms a lot to think about, and considerations other than technology need to be factored in. Here is GreySpark Partners’ view of the key considerations for financial firms as the industry moves to T+1 settlement:
Operations: If necessary, firms should consider relocating staff or processes to other parts of the world in order to meet the T+1 requirements. Firms need to ensure that all departments are synchronised and organised in a way that maximises trade settlement efficiency, both internally and with external counterparties. Increased time pressures will make clear communication and organisation vital to a successful T+1 transition. Relocating support teams in the APAC region to the US may be a prudent move if they are, in effect, facing a drastically shorter settlement period and heightened risk of settlement failure. Increasing headcount may also be an option. Additionally, firms may use the remaining time before implementation to build up currency reserves to help with prefunding transactions that may be difficult to fund in real-time once the T+1 settlement period is in effect;
Testing: During the testing periods, firms should conduct health assessments, examining all systems and their interconnectedness. The DTCC is currently providing bi-weekly T+1 testing for nine months prior to implementation, beginning on 14 August 2023 and finishing on the implementation deadline. Industry infrastructures participating in the testing include DTCC’s subsidiaries ITP, NSCC and DTC and the NASDAQ and CBOE exchanges;
Regulation: The SEC has not incorporated regulatory fines or penalties within the T+1 settlement requirements. This has led to some firms to believe that there is little incentive to comply with T+1 settlement deadlines. However, failure to comply could create downstream liquidity and market risk, as well as leading to negative reputational consequences. If the number of settlement failures by in-scope firms becomes too high, the SEC has hinted that it could intervene;
Cost: Firms need to consider the cost of implementing new or updating existing technology infrastructures, relocating staff and increasing headcounts.
The new T+1 trade settlement period in the US promises to bring a heady mix of excitement, confusion and uncertainty. It presents a huge opportunity for financial firms to streamline and rejuvenate their workflows and create a more efficient trading ecosystem. Equally, though, it is likely to bring teething problems that will include operational difficulties and bottlenecks if the transition process is not executed correctly, which could have negative financial and reputational consequences.
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