The coming move to T+1 represents an operational challenge far exceeding anything firms experienced in past shifts to T+5, T+3 or even T+2. Fortunately, innovations like robotic process automation and artificial intelligence are creating unprecedented opportunities to meet that challenge by accelerating parts of the trade life cycle. But technology alone won’t be enough. In addition to the hefty IT investments, making the shift to a 24-hour settlement window will require some fundamental changes in behavior.

In previous changes to the settlement cycle, market participants could adapt to the faster pace by speeding up existing practices—often by throwing additional bodies at manual processes. A 24-hour window will leave little to no time for manual operations. To function in a T+1 environment, firms will have to automate wherever and whenever possible, and rethink how they approach tasks in which some level of human intervention is required.

Take a fundamental process like trade affirmation. In a T+1 cycle, large financial institutions and asset managers will automate the task with centralized matching platforms capable of automatically affirming a trade when match occurs between the buy and sell side. But firms without the resources to deploy this technology might struggle. Currently, many firms email trade details to counterparties the day after a trade. These firms will have to alter the way they operate in order to get this information to counterparties much faster. In turn, sell-side firms will have to figure out ways to accommodate these slower-moving clients in the new, compressed settlement cycle.

The solutions to these challenges will blend process improvement and tech innovation. Consider the routine process of exception resolution. Even if firms are able to automate most parts of the trade reconciliation process, and even if they are able to use AI and other technology to identify breaks, resolving those breaks will still require some level of human intervention to pinpoint the remedy, as well as some communication with a trader or the counterparty to facilitate a fix, and additional internal communication to implement it.

That resolution process will take up valuable time in the shortened window, especially for large sell-side firms processing trades for scores of clients. To complete that work the new settlement cycle, firms will have to rethink and restructure their approaches. For example, firms might switch from existing exception management processes in which they identify and resolve trade breaks on a one-off basis, to an “exception elimination” framework in which, in addition to resolving the immediate break, they also follow through and identify and resolve the root cause of the problem. That might entail reaching out to a trader or middle-office professional to correct inaccurate settlement instructions or some other mistake in a given account. Because actions like those will eliminate the issue once and for all, firms can reduce both the overall number of exceptions and the time it takes to resolve them.

Virtually all strategies for speeding up the settlement process will be dependent on data. Financial service firms are embarking on data transformation initiatives designed to increase internal efficiency, lower costs, improve client service and contribute to a host of additional business goals. These transformation efforts will play a crucial role in the move to T+1. As the trade cycle compresses, data must be available to every node in the process in something close to real time. Those data must be up-to-date, accurate, and presented in a standardized format for easy use. In most cases, achieving those standards will require some fundamental changes to data and IT architecture, with point-to-point data exchanges giving way to more holistic data warehouse configurations.

Timely, reliable data are the primary requirement for RPA, AI, ML and other technologies that have the potential to exponentially accelerate every aspect of the trade process.

Integrating these new technologies and process improvements into a new, 24-hour settlement process will be no easy task. For many firms, the transition will be further complicated by the fact that the last settlement cycle contraction took place five years ago. Many of the operational professionals who managed that transition have retired or moved on to other positions. With the SEC aiming for a move to T+1 as early as the first half of 2024, both buy side and sell side firms should be acting now to gather the management, technology, and operational talent they will need to meet this unprecedented challenge.