Accelerating settlement in the US and Canada from the current standard of T+2 to T+1 promises to reduce market risk and margin requirements while enabling clearing participants to use capital in other ways. It will also significantly reduce the time to deal with exceptions or correct errors.
At the SIFMA Ops conference in Phoenix last month, panelists indicated that, in reality, the build-out should be finalised by the end of 2023 to provide ample time for testing to ensure market stability and resiliency – and implement the move to T+1 by September 3, 2024.
The concern is evident: Respondents to a SIFMA survey conducted before the conference named T+1 settlement as their top operations and technology priority for the next two years over all others.
How impactful will T+1 be on firms’ current workflows and infrastructures compared to T+2? What will be the global effects once the US and Canada have implemented T+1? How will firms be able to respond within the set timeline amid dozens of other simultaneous regulatory priorities?
How is moving to T+1 different than T+2?
Although removing one more day from the settlement cycle may seem minor, T+1 represents both a market structure and a technology compression event and will impact all market participants. For example, institutional investors will need to make significant changes in their systems, processes, staffing, and documentation.
T+1 will also fundamentally alter the way the industry does business across many processes and products, not just make basic changes that an acceleration of work schedules can accommodate.
The level of innovation firms implemented for T+2 may be a critical determining factor in their success in transitioning to T+1. Those that did the bare minimum for T+2, or remain heavily reliant on legacy systems, are likely to have difficulty meeting T+1 settlement requirements.
What will be the impact on current operational processes and data?
Firms can expect global changes in processes and workflows across all operations functions, including securities lending and margin. As a result, the focus will shift to technology that can support near-24/7 operations.
In an on-site poll at the SIFMA Ops conference, 76.8% of attendees said the transition to T+1 would have a significant impact on their firm; 41.7% said they have already mobilised a formal program and begun assessing potential impacts, and 36.2% said in-house technology changes and testing would be their biggest hurdle. And their most significant challenge to getting to T+1 is operational processes.
Operations professionals need to standardise, normalise, and eliminate manual processes to speed up the trade lifecycle. And given the current timeline, it has become increasingly clear that data – and how operational data can be transformed into innovative analytics – will be the keystone to how relationships will be redefined between front- and back-office operations.
Hedge funds, broker-dealers, and other capital market participants are leveraging increasing data volumes to understand better how markets are behaving, recognise buying and selling patterns, and gain transparency into correlation, contagion, risk, and valuation. This is a positive trend.
Yet the most significant uncertainty stems from breaks and common errors in workflows. To prepare for T+1, firms will need to inventory their clients and vendors to identify counterparties that currently send delayed, incomplete or erroneous data that can cause breaks or fails or make frequent changes to their data feeds.
Other concerns involve handling standard settlement instructions and the increased workload on key talent and already stretched thin budgets.
How will T+1 synch with the rest of the world?
Other countries and regions will likely follow the US and Canada T+1 implementation given the size of the US equity markets (representing 41.6% of the $117 trillion global equity market cap), but it is not likely in 2024. In the meantime, the compressed settlement timeframe will cause time zone complications and FX questions. Firms, particularly those without US-based operations, will need to adjust staffing and processes to match US East Coast timeframes.
What actions should you take now?
Generally, the industry has laid out the following T+1 implementation timeline:
- 2022: Impact analysis, budgeting, and management buy-in
- 2023: Securing budgets, building and implementing changes
- 2024: Testing and launch
Not surprisingly, SIFMA’s pre-event survey said that most participants considered technology their most significant challenge in getting to T+1. It’s also becoming increasingly clear that data quality, integrity, control, and analytics will be prerequisites for a successful transition to T+1.
Here are four key things firms will need to do in 2022 to prepare for T+1 effectively:
- Gather metrics and report on the potential sources of breaks and exceptions and the counterparties that may be responsible
- Analyse the root cause of fails due to problems with settlement instructions, settlement, price differences, and other systemic sources of errors
- Examine your technology platforms, workflows, and reconciliation controls to identify existing manual processes and connectivity gaps, how controls are onboarded, and opportunities to configure controls self-sufficiently to eliminate friction points.
- Identify problems with your data's speed, quality, and integrity – from collection and normalisation to integration and intersystem controls – and current problems across middle and back-office functions.
T+1 may be all-consuming for many firms, and the overnight cycle will change dramatically before too long. And just think – T+0 won’t be too far behind.
Firms that modernise their operations and focus keenly on data quality and integrity will be the most successful in transitioning to T+1 settlement and clearing.