What makes the move to T+1 unique from previous settlement date compressions?
GIBSON:
Compressing the trade settlement cycle from two days to one day is a much bigger leap than the transition from T+3 to T+2. T+2 gives firms until noon on day two to affirm counterparty trades; T+1 requires overnight affirmation. Those firms that were still able to meet the demands of T+2 through additional resources and procedural changes will find that a 24-hour settlement window leaves little time for manual operations.
Is T+1 positive for market participants?
GIBSON:
Most believe accelerated settlement has positive benefits to the industry. However, there is a need to evaluate the incremental benefits in reducing risk with a shorter settlement window.
We believe that the one-time investment in technology and operational process changes — which are significant — are necessary, especially as the industry continues its march toward real-time settlement.
When will T+1 happen? Will the industry be ready?
SMITH:
The Depository Trust & Clearing Corporation (DTCC) along with The Securities Industry and Financial Markets Association (SIFMA) is currently recommending that firms adopt T+1 for U.S. trading activities by the first half of 2024. Given the amount of processes that will be impacted by T+1, firms that have already started planning will be in a better position to implement changes successfully.
How can firms calculate how much they need to spend to move their technology and operations to T+1?
SMITH:
Begin with a bottoms-up analysis of how the proposed DTCC T+1 settlement timeline will impact how your firm operates today. Create a list of changes required for each functional area to determine what you need to accomplish to be ready.
Answer questions such as:
- How many manual interventions and how much unautomated processing occurs in our current trade processing?
- Will our current technology stack support accelerate settlement under T+1 or T+0?
- How much of our daily operational procedures will need to change to support a compressed timeline?
- Do we need new exception management tools?
- Which business lines will be affected by accelerated settlement? And how?
Once you complete the analysis, then begin to associate costs for the changes.
How will T+1 impact a firm’s balance sheet and revenue streams?
SMITH:
With the reduction of unsettled position risk by a day, firms should net additional capital to deploy elsewhere that otherwise would be deposited at DTCC. Liquidity risk capital charges and coverage buffers may also be reduced. Firms will need greater transparency into cash availability, sources, and uses because of accelerated settlement.
Without efficient forecasting of your funding needs throughout the day, calculating settlement obligations will be a challenge. You may need to hold additional capital to mitigate the risk of a missed trade, or an unexpected economic trade correction.
A compressed settlement timeline increases the risk of a trade failing to settle. Firms unable to reconcile and settle trades in a compressed timeline could be impacted with increased labor costs, finance charges, and capital charges.
How should we approach testing?
SMITH:
Given the scope of the changes — and the consequence of not settling trades in time — firms must get the shift to T+1 right. This means a rigorous process to evaluate workflow and human resources to support the changes. Key areas include trade matching and allocations, settlement, securities lending, funding, end-of-day batch processing, and cross-border settlements.
Since it will be challenging to perform testing while maintaining daily operations, an organization-wide testing strategy is critical. The required testing will most likely last six to eight months. Testing is a huge undertaking that firms shouldn’t underestimate.
Is T+1 an opportunity to automate and streamline a firm’s technology and operations?
SMITH:
T+1 leaves very little time for manual processing, making this a great opportunity for firms that may have lagged their peers in technology investments. Now is the time to start focusing on simplifying your front-to-back technology to unlock cost reduction opportunities and enable greater agility so your firm can adapt to a changing market landscape.
It is also an ideal time to re-think your resource strategy to support accelerated settlement. Should operational responsibilities be re-allocated to global resources in a follow-the-clock strategy? Or should some of settlement operations be centralized though outsourcing to meet the new settlement timeline?
Where should firms start?
GIBSON:
The key is to approach the move to accelerated settlement in a methodological manner. A readiness roadmap is required to help firms understand the impact and decide what to prioritize. As a starting point, analyze how various instruments settle in a T+2 environment today, and overlay the proposed T+1 timeline to identify which functions need to change to meet the new settlement window. Recognize that processes with issues today will be exacerbated in a compressed settlement cycle.
This is where Broadridge can add value. We have deep domain knowledge and understand the full transaction lifecycle, we can help firms determine which changes are critical to becoming compliant, implement those changes, and help with testing and deployment.
