The US T+1 Trade Settlement Cycle
The technology and business impact of US T+1 trade settlement
Technology impact
The new US trade settlement cycle will require a significant overhaul of existing technology infrastructure, potentially incurring high up-front costs for some firms. According to Accenture, some capital market participants are expecting the T+1 transition to cost them between US$6 and US$10 million over the ‘next few years.’ In-depth reviews of technology infrastructure will likely be necessary in order to identify gaps and inefficiencies.
All aspects of the trade life cycle, such as communications, connectivity, execution, processing, settlement and reconciliations will need to be optimised. This will likely mean embracing automation, including the use of APIs and cloud technologies and using straight-through processing, while reducing reliance on manual trade management processes and legacy infrastructures. Crucially, infrastructure will need to be resilient enough to withstand high transactional volumes and reduced settlement times while maintaining the integrity and security of existing operations. Interoperability and cohesion between different systems may be affected as financial firms adopt the necessary technologies, which will likely lead to more errors . Financial firms will also need to monitor the new architectures in order to mitigate against operational risks and bottlenecks.
The technological impact of T+1 will inevitably vary from firm to firm. Larger firms may have the funds to adopt automated technologies from technology vendors, or conversely, already have the relevant infrastructure in place. However, smaller firms may have to relocate operational teams if the increased technology expenditure is unfeasible.
Generally speaking, buyside firms’ technology will need to become more nimble and operate in real time. For example, due to T+1, the buyside will need technology that supplies prime brokers with real-time trade details as trades are matched between the asset manager and executing broker. Currently, buyside firms deliver trade data to executing brokers and prime brokers separately, which would not be appropriate for T+1 settlement if there were any trade discrepancies.
Sellside firms will require something akin to a real-time view of cash flows and inventories across the organisation. According to Broadridge, most firms currently do not have a holistic, real-time overview of their inventories, with positions spread between multiple DTCC accounts across multiple business lines and jurisdictions.
Business impact
In a T+1 settlement cycle, if a trade is executed today, the confirmation or affirmation process should occur on the trade date, effectively leaving no margin for error.
It is key to note that the adjustment to the T+1 settlement cycle is not only a post-trade issue faced by post-trade divisions in firms, but rather, one faced by the entire firm. Critical business areas, ranging from front office trading desks to back office accounting and reconciliations teams will have to increase the speed and precision in which they carry out their daily duties. For example, the back office will need to come up with a process of swiftly updating and managing account information to provide the front office with an accurate overview of the actual cash balance available to them before executing a trade. Some middle office departments will now largely have to re-paper client agreements and shift to e-contracts. Given these increased pressures, a more unsettled and frenetic workflow could ensue. Again, this could lead to more errors being made, especially if personnel don’t have the sufficient skill sets to operate new technologies. Generally speaking, the shift to T+1 settlement will require a new mindset for financial firms, with automation having to override familiar but equally inefficient processes, such as batch processing. In addition to technical expertise, softer skills such as organisation and communication across different business departments will be of paramount importance.
The significance of the impact felt by financial firms in the new settlement cycle is also determined by the size and location of a firm’s core business. Smaller firms may find the reduced settlement cycle harder to deal with than larger ones, due to disparities in the size of teams who have to deal with the same, tighter settlement deadlines as their larger counterparts, while also fulfilling other duties. It may be necessary for headcounts to be increased or for the working hours of employees to be altered through implementing shift work.
In-scope firms will also need to adjust to time zone constraints, with businesses needing to exercise the possibility of outsourcing, or re-locating employees. As shown in part two of this three-part series, firms in the APAC region are set to be most affected by time zone challenges.