US T+1 Technicalities that the Mainstream may be Missing
Key T+1 information that must be considered
This week, GreySpark listened in on a webinar from investment management firm Northern Trust, which gave some key points for financial firms to consider ahead of the new T+1 security trade settlement period in the US, effective on 28 May, 2024. As well as providing a generic overview of what the new settlement period will mean for in-scope financial firms and how they can best navigate it, it explored some more granular technicalities that some firms may currently be overlooking ,while also providing clarity to the industry’s most pressing T+1 questions. As a result, we thought we would take a closer look at these below.
Who T+1 actually affects
Many capital markets participants think that T+1 transition is specifically a US change. Although the Securities and Exchange Commission (SEC) requires only broker-dealers domiciled in the US to affirm all trades on trade date, those not falling under this legal requirement will still feel the effects. For example, those broker-dealers executing trades in the US has an obligation from the SEC to check that its clients overseas (such as in Europe and APAC) are allocating and affirming trades under the T+1 rules in order to help them meet the requirements. As such, a large impact across Europe and Asia-Pacific is going to be felt, even if they don’t explicitly fall under the regulations, with financial firms having to revamp their operating, treasury and client models in order to stay aligned. However, the new T+1 settlement period also has specific exemptions. For example, dual-listed securities and foreign securities trades executed in Europe and Asia-Pacific are excluded from the scope. As a rule of thumb, securities trades that settle in the US markets are in scope.
Timings
Given time zone differences, the amount of time some firms will have to affirm and allocate trades is going to drop significantly. For example, some firms in APAC will see the amount of time they have to affirm and allocate trades fall by roughly 80 per cent, with the SEC expecting trades to be allocated and affirmed by 9pm EST on trade date. This will leave some firms with no choice but to re-locate staff to the US and deeply rethink their post-trade and back-office functions. At the same time, some firms will need to consider pre-funding in order to meet their tighter liquidity needs. However, firms will need to consider how much credit they can keep on hand without breaking regulatory restrictions. For example, the European Securities and Markets Authority (ESMA) requires central counter parties to maintain certain thresholds of financial resources for pre-funding.
In addition, T+1 settlement in the US is effective on 28 May, 2024. Mexico and Canada go live with their own T+1 settlement periods on the day before, which is a bank holiday in the US. On top of this the FTSE and Russell-based indices will rebalance from 24 May 2024, which is the last trading day before the T+1 implementation date (in light of the bank holiday). Collectively, this is likely to induce significant market volatility, which financial firms should consider.
What can firms do ahead of the May implementation date?
Time is currently of the essence, with the T+1 implementation date a little more than a month away. In-scope financial firms should be doing all they can to prepare for the new requirements in the best possible way. A priority for firms should be to consider to what extent they are in scope of the US T+1 requirements and whether or not they are on track to meet these requirements. This requires a forensic evaluation of a firm’s straight through processing capabilities, front to back office functions, service provider relationships, liquidity, record keeping and reporting. However, aside from a generic, holistic business model evaluation, there are some more specific measures financial firms can take in order to ensure that their trade settlement processes are optimised.
Given the shortening settlement period, any firm currently experiencing trade settlement bottlenecks on ‘T+2’ are likely to get worse. Currently in the capital markets industry, inaccurate and out of date standing settlement instructions (SSIs) are a key cause of trade settlement failures. SSIs are a set of instructions that dictate how a trade should be settled, including the bank accounts that should be used, the currency that should be used for settlement, and other important details. Cleaning up SSIs may just be the difference between a firm achieving trade efficiency under T+1 or not. In order to do this, the DTCC suggests to clients to adopt TradeSuite ID processing, which is being established as an industry best-practice. TradeSuite ID allows firms to affirm and monitor the affirmation status of their trades by providing each trade with a unique ID code that can be tracked and managed, while providing a time stamp of trade orders. In doing so, this provides full visibility and transparency of a firm’s trades, while also helping to assist firms in regulatory compliance reporting.
If you would like to find out more about more about the upcoming T+1 settlement period in the US, why not check out our ‘Implications of transition T+1 settlement in the US’ report here.
Do you have any thoughts on this matter? We’d love to hear from you in the comments section down below!