Accelerated settlements: T+1 settlement challenges

The financial industry is marching towards T+1 settlements, but the evolution of accelerated settlements isn’t anything new. For decades, firms have been striving to reduce the number of failed trades and related settlement frustrations. Advances in IT and operations have laid much of the groundwork for a new era for settlement, but challenges remain, especially for buy-side firms.

Following his participation in a recent FTF News webinar on Making the Most of the New Settlement Landscape, Julian Trostinsky, Gresham’s expert on buy-side settlements, provides his insights and key takeaways from the panel discussion.

What do you see as the biggest hurdle firms will face in getting ready for T+1 settlements in 2024?

During our panel discussion last month, we asked attendees what they see as their biggest T+1 challenge. 50% said they were concerned about the inconsistency between settlement timelines across the major markets, and 43% said technology limitations were their biggest challenge. These results are pretty consistent with what I’ve been hearing from our customers here at Gresham.

Simply put, we can’t throw more staff at this initiative; we need to finally move away from manual processes. Transitioning to T+1 settlements will require firms to upgrade their existing infrastructure and systems, enhance connectivity and ensure seamless integration across various platforms. It can be a complex and time-consuming process, especially for larger firms with legacy systems. Small to medium-sized firms tend to have leaner internal teams, expertise, and IT capacity, and will be more reliant on third parties to help.

So, the first thing firms need to do is evaluate their internal processes and see where they can automate manual tasks and optimise workflows. Strengthening risk management frameworks such as pre-trade risk controls, collateral management, and post-trade reconciliation processes will be key as well.

What are the major technology barriers for buy-side firms in moving to T+1?

Tech barriers for buy-side firms range from data management and integration to connectivity and communication, risk management, and regulatory compliance. Buy-side firms will also need to ensure scalability to accommodate the increased trade flow and transaction volume within the shorter settlement timeframe.

That’s where efficient data integrity and agility become especially crucial. Buy-side firms will need to be able to get data in faster so firms can start reconciliation and identifying exceptions as soon as possible. The ability to handle increased trade volumes, process and validate trade data quickly, and ensure data accuracy and integrity is essential here. Integrating data from multiple sources such as exchanges, brokers, and custodians, in real-time will be necessary to support the accelerated settlement process.

So, T+1 forces firms to focus on streamlining trade workflows and becoming more efficient. That means automating trade capture, confirmation, and reconciliation processes and minimising manual touchpoints. Faster and standardised connectivity and communication channels are also vital for buy-side firms to interact with brokers, custodians, clearinghouses, and other market participants involved in the settlement process.

What steps should non-SWIFT-enabled clients take to adjust to the shorter settlement times?

SWIFT is widely used in the financial industry for secure and standardised communication. In fact, 69% of our webinar attendees said they plan to use SWIFT messages to prepare for accelerated settlement. But what about the other 31%?

Non-SWIFT-enabled clients should assess their existing communication channels for trade instructions and settlement information, identify the strengths and limitations of the current channels (such as email, fax, phone, or proprietary platforms), and evaluate the efficiency, reliability, and scalability of these channels for handling increased trade volumes within the shorter settlement timeframe.

Non-SWIFT-enabled clients can explore the possibility of connecting to SWIFT or leveraging SWIFT service bureaus or vendors to gain access to the network. My advice is to speak with your service providers such as custodians, brokers, or fund administrators to understand the available options for communication and settlement instruction and discuss the impact of shorter settlement times on existing processes. Service providers may offer their own proprietary platforms or connectivity solutions to facilitate faster communication and settlement.

Also, leveraging electronic trading platforms or vendor solutions may provide more efficient trade execution, confirmation, and settlement functionality, or offer automated workflows, real-time data exchange, and integrated messaging capabilities to streamline the trade lifecycle and support faster settlement cycles.

How will T+1 impact a buy-side firm’s communication with custodians and their overall role in the firm’s business? 

T+1 settlement requires faster communication between buy-side firms and custodians. Trade instructions, settlement details, and other relevant information need to be exchanged quickly to meet the shortened settlement cycle.

Buy-side firms will need to promptly confirm and reconcile trades with their custodians. Communication channels for trade affirmation and reconciliation will become more critical to ensure accuracy and timeliness, as will internal processes and systems to streamline workflows and address any discrepancies.

Also, custodians play a vital role in collateral management. With T+1 settlement, collateral movements, and collateral optimisation become more time-sensitive. Effective communication with custodians regarding collateral requirements, transfers, and valuations will be crucial to manage risk, optimise funding costs and comply with regulatory requirements.

In addition, the shorter settlement cycle may impact the timing and availability of the reporting services and valuations custodians provide. Therefore, buy-side firms should align their requirements with custodians’ capabilities and ensure clear communication to meet reporting deadlines and accurate portfolio valuations.

Which is the most critical step in T+1 settlement for organisations that are not yet ready in terms of trade capture, reconciliation, reporting, and other processes?

For these organisations, it is essential to prioritise improving trade capture and confirmation. This involves ensuring timely and accurate capture of trade details, trade matching with counterparties, and confirming trades within the accelerated settlement timeframe.

By enhancing trade capture and confirmation, firms can lay a solid foundation for efficient settlement processes, timely reconciliation, and accurate reporting. It ensures the trade details are captured accurately, validated promptly, and aligned with the intended settlement timeframe.

It’s important to note that while trade capture and confirmation is a critical step, the overall readiness for T+1 settlement also depends on the organisation’s specific requirements, systems, and processes. A comprehensive approach involving improvements in reconciliation, reporting, risk management, and regulatory compliance will ensure a successful transition to T+1 settlement.

Taking the Next Step

Addressing technology barriers will require collaboration among buy-side firms, technology vendors, and other industry stakeholders. Firms should carefully plan their technology roadmap, engage with technology partners and ensure a well-executed implementation strategy to overcome these barriers and successfully transition to T+1 settlement.

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