State Street
Jeff Sardinha
Sep 2024
With the US transition to T+1 more than 100 days in,
Jeff Sardinha, head of ETF Solutions, North America at State Street, speaks to Asset Servicing Times about the impact of the new settlement cycle on the ETF market
Image: State Street
How would you evaluate the overall success of the T+1 transition for your firm and the broader US market over the first 100 days?
It could not have gone much better than it did considering the scope and impact the regulation had on the exchange traded fund (ETF) marketplace. A move to T+1, and T+0 in some cases, was much different than the move from T+3 to T+2, or even T+5 to T+3. State Street benefited from the 2019 move from T+3 to T+2. We were able to lay the groundwork for the eventual move to T+1. Based on how an ETF functions across two marketplaces (primarily with the fund and secondarily on the exchange) there was always a benefit to offering a shortened settlement cycle to the standard US settlement cycle. The shortened settlement optionality allows for more aggressive pricing of the ETF in the secondary market. When the US moved to T+2, State Street and the rest of the ETF industry was supporting T+1. Over the first 100 days we have seen usage of the T+0 shortened settlement capability on a daily basis, but not the volume of T+1 shortened settlement orders we saw when the move to T+2 occurred. Part of that is how new the T+0 change is and firms testing that the capabilities work the way they were intended to work. I fully expect an increase in volume as we get towards the end of 2024.
What specific challenges did your US-based clients encounter during the transition to T+1, and what were the most significant gaps you identified in terms of market preparedness? How were all these issues addressed?
The ETF marketplace was relatively well prepared to support the move to T+1. The ecosystem participants including custodians, administrators, authorised participants, market makers, and fund sponsors, spent the better part of a year working through what the move to T+1 meant to ETFs. There were a number of changes required to better support an ETF and allow for the same cost and operational efficiency that ETFs have become known for.
Whenever there are industry-wide changes the challenges are usually around the unknown, which I would define as something no one thought about or knock on impacts of changes that were not considered. In the end the items that did arise were small and required more education and discussion to alleviate than systematic change.
Can you elaborate on the technological upgrades your firm implemented to facilitate the transition to T+1 in the US market? How did these changes impact your operations? What role did automation and modernisation of workflows play in ensuring a smooth transition to T+1 for your firm?
State Street made technology changes across the ETF technology stack covering the lifecycle of the ETF. Starting with our primary market order taking platform, Fund Connect, we extended order taking windows earlier in the business day as well as created intraday reporting capabilities to allow for T+0 settlement. Moving onto our ETF Global Platform that is used to support basket production, security transfer instructions, and reporting. We made changes to allow for intraday creation of transfer instructions to be released to the marketplace in support of the expedited settlement. Lastly, we looked beyond what was needed to support the expedited settlement and made changes to the collateral processing used in ETF settlements. State Street added the ability to do same day returns of collateral. This should provide savings to ecosystem members within the primary market settlement and benefit the underlying purchaser of the ETF. To date we have seen a reduction in collateral held by about 24 per cent. This should equate to savings down the value stream.
The modernisation of the workflow allowed for more intraday capabilities which we think is a need across the ETF industry with the proliferation of active management. The more accurate and timely data you have the more opportunity a manager has to make decisions to the benefit of shareholders. This is part of the reason that State Street created its ALPHA front-to-back platform that includes integrations between back office, middle office, and front office.
What benefits, if any, have you and your US clients noticed already as a result of moving to a T+1 settlement cycle? Have there been any unexpected challenges now that it is in operation?
The goal for the ETF industry was to avoid operational inefficiencies which could lead to high costs and friction. If the industry did not come together to design and make the changes described the ETF would still function. The ETF would just function less efficiently, and likely be more costly. That is the biggest benefit I have seen of the work that was done. ETFs have been taking an outsized portion of flows across both passive and active for years. The goal was not to disrupt that and I think we successfully accomplished that. Additional benefits we have seen over the first 100 days is a reduction in collateral as mentioned previously. There are a few things coming together on that reduction. Part is the same day collateral return capability State Street rolled out. Part is a reduction in fail rates from Aps. At the same time any use of a T+0 settlement would increase collateral on hand. If we strip out the T+0 settlements the collateral savings are greater than the 24 per cent mentioned.
What feedback have you received from your international clients regarding the new T+1 settlement cycle, especially considering time zone differences and their interactions with the US market?
Similarly in Europe, the transition went as well as could be expected due to the high focus across the industry, including cross participant working groups, in advance of the change. If there was a negative consequence it was to a subset of European listed ETFs that have large US exposure.
Increased funding cost can occur at times for APs where the settlement cycle of the order has been reduced to match the US market while the remainder of the fund exposures in Europe would be T+2.
What lessons have you learned from the transition to T+1 that could inform future regulatory or operational changes in the US securities settlement process?
The ETF marketplace is ahead of the baseline settlement timelines when we went beyond T+1 and created the capability to support T+0. From a legacy financial markets perspective there is not much more room to reduce settlement.
I think where the conversation goes is to move processes that took place on legacy financial rails onto digital rails, more specifically, Tokenisation of assets.
There are teams of people inside of State Street and other ecosystem members working on Tokenisation efforts.
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