T+1, digital assets & regulations: security priority list | Gresham

We were thrilled to participate in the SIFMA Ops 2022 conference in Phoenix, Arizona. While digitisation in the securities industry has come a long way in recent years, there is much work ahead to continue driving innovation in response to risk, technology, policy, and regulatory changes.

Concerns and uncertainty about tackling shortening settlement cycles, operational resiliency, digital assets, and regulatory priorities and initiatives reigned supreme in the minds of operations, technology, and regulatory leaders.

In fact, respondents to a survey conducted by SIFMA before the conference said “technology optimisation” (22.4%) was the top operations and technology priority for the next two years, followed by “T+1” (18.1%).

If you missed SIFMA Ops 2022, here’s an overview of the hot topics discussed.

T+1 settlement

Accelerating settlement in the US and Canada from the current standard of T+2, adopted in 2017, to T+1 in 2024 will be both a market structure and a technology compression event that will create:

• A significant change in the overnight cycle that squeezes traditional batch runs
• A reduced window to resolve exceptions and correct errors
• Uncertainty around the source of breaks and common errors in workflows
• Concerns over handling of standard settlement instructions
• Increased constraints on already stretched talent and budgets

Not surprisingly, SIFMA’s pre-event survey said that most participants considered technology their most significant challenge in getting to T+1.

The industry has laid out a path to implement this move by September 3, 2024. In reality, this means the build-out should be finalised by the end of 2023 to provide ample testing time to ensure market stability and resiliency. This summer, as the SEC plans to release a playbook for implementation, firms can expect the following timeline:

• 2022: Impact analysis, budgeting, and management buy-in
• 2023: Securing budgets, building and implementing changes
• 2024: Testing and launch

It’s also becoming increasingly clear that data quality, integrity, and control – and how operational data can be transformed into innovative analytics – will be a prerequisite for a successful transition to T+1.

Digital assets

Institutions’ interest in cryptocurrencies has been slow and spotty across the industry, even as corporate clients have started to show interest in holding digital assets on their balance sheets. SIFMA’s survey indicated that more than 36% of respondents have little to no interest in crypto asset investing.

However, macro hedge funds have begun to show interest in trading cryptocurrency as an asset class. At the same time, interest from traditional long-only asset managers has also emerged. These firms are now building out the operational and research infrastructure to treat cryptocurrencies as asset classes.

Given the growth and potential scope of new digital assets, firms must be ready to evolve from the traditional model of exchanging securities for cash to a digital environment where clearing houses become asset transfer facilitators handling a variety of asset-for-asset transactions.

An IRS-approved custodian recently went live with Gresham’s Control for cash and credit card reconciliations and plans to add digital currencies in the near future.

An aggressive regulatory agenda

The critical question on the minds of SIFMA Ops attendees was whether or not the Securities Exchange Commission (SEC) and other regulators are overdoing the regulatory initiatives.

In one of the most ambitious agendas in its history, the SEC has simultaneously undertaken multiple mandates that would affect nearly every investor and public company in the US. SIFMA believes that meaningful public input into the rulemaking process is at risk of being lost in the current rulemaking agenda.

Read more about the SEC rulemaking agenda here.

In the fall of 2021, the SEC released a list of upcoming new rules with 54 separate items. Since December, the SEC has issued 24 proposals to make various changes to complicated securities laws and financial markets. Just 12 of these proposals add up to about 3500 pages of text and ask 2200 different questions.

Are there too many initiatives for firms to respond to as the US and Canada simultaneously embark on transitioning to T+1? What will occur in the last phase of the Consolidated Audit Trail (CAT) when the personal information of tens of millions of people will be vulnerable to hackers just 60 days from now?

Whether regulators want broker-dealers to set up a separate entity for digital assets; alternative trading systems (ATS) to take custody of digital securities; or will allow remote staff to use their home address as an office address – it all comes down to the quality and integrity of data, and the ability to simplify regulatory reporting.

The culture of work

From return to the office and remote work supervision to the Great Resignation, the pandemic upended the capital markets workforce. The dramatic shifts across the securities operations and technology landscape continue to evolve.

All indications point to hybrid work schedules as the mainstay, as firms focus on fair work environments and equal opportunity regardless of work schedule or location. And while FINRA has embraced some digitisation in the last two years, the question remains, what aspects of supervision still need to be done in person? Will visiting every office in person be necessary? FINRA expects to make a risk assessment update in the near future.

People are the engine that drives operational excellence. But the demand for talent outweighs the available pool of qualified candidates. As firms are fighting to attract and retain talent, they are looking inward to raise the skillset and profile of operations.

The operations and technology outlook

Industry leaders anticipate a five-year view of technology evolving to the point in which subject matter experts (SMEs) will become more involved in configuring workflows and financial controls. As a result of this shift to more self-service control, friction points will begin to disappear, thereby paving the path for increased operational resiliency.

To speak to our SIFMA Ops team about any of the issues above, please contact us here.




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