T+1 settlement - Why trade reconciliation just became more critical

The capital markets industry is constantly evolving and adapting to new technologies and best practices to improve efficiency and reduce risk. The move to T+1 settlement in the US will have a significant impact on this evolution. With the rule now officially adopted, the T+1 cycle for most US securities transactions is scheduled to go into effect on May 28, 2024.

The move to T+1 settlement has been driven by many factors: the need for faster and more efficient settlement, increased competition, and tighter regulatory requirements. While the shorter settlement cycle offers several benefits – such as reduced credit, market, liquidity and counterparty risk, and lower margin requirements and transaction costs – it also introduces new challenges for trade reconciliation.

The devil’s in the (trade) details

Trade reconciliation plays a crucial role in the settlement process, helping to identify and resolve any discrepancies between the two parties' recording of a trade. In the context of T+1 settlement, trade reconciliation becomes even more important because of the increased potential for errors and mismatches in the underlying trade details which can result in settlement failures.

By implementing a shorter settlement cycle, there is less time to identify and resolve discrepancies. Settlement failures can have serious implications because it can erode confidence in the financial system, increase trading costs through fines, cause reputational damage, and potentially lead to both legal and regulatory consequences. To avoid these risks, trade-date reconciliations must be automated to address the fact that there is less time to intervene with a shorter settlement cycle.

Driving automation with accurate data

One of the key challenges in trade reconciliation is ensuring the accuracy of trade data which is often created and maintained by multiple parties, who will most likely be using different systems and processes for capturing and reporting trades. This can result in discrepancies in trade data that need to be resolved before settlement can occur.

To effectively reconcile trades, it is essential to have accurate and up-to-date information about each trade along with clean standard settlement instructions (SSIs) to help drive automation. This information should include details such as the trade date, the counterparty, the security involved, funding account and the terms of the trade. In addition, it is important to have access to real-time information about the status of each trade, such as whether it has been executed, confirmed or settled.

Accelerating exception resolution

Another challenge in trade reconciliation is ensuring timely and efficient resolution of exceptions. This is especially important in the context of T+1 when there will be less time to resolve discrepancies before settlement.

To address this challenge, it is important to have clear and efficient processes for resolving differences as well as effective communication between the parties involved. Lastly, robust controls are crucial to ensure the accuracy and completeness of your firm's reconciliation processes. This includes having the right technology partners and solutions in place to facilitate a trade reconciliation process that identifies and resolves issues quickly.

Efficient reconciliation crucial for T+1

The move to T+1 settlement has introduced new challenges and risks in the financial industry including the need for effective trade reconciliation which is critical to ensure the accuracy and completeness of financial transactions and avoid settlement failures. Addressing these challenges will enable the capital markets industry to continue to evolve, improve and ensure the stability and efficiency of the financial system.

Having accurate and up-to-date information about each trade, clear and efficient processes for resolving discrepancies, and robust controls are crucial for T+1. If your firm’s preparations for T+1 are constrained by inadequate data, technology and processes, then you will need to start resolving those issues now to meet the May 2024 deadline.

We can help you overcome these challenges in your journey to make T+1 a reality. Contact us to learn how Gresham is helping firms like yours improve their data integrity, reconciliation and back-office workflows.