A question of space and time
08 Feb 2023
The year for the US and Canada to move their settlement compression time is almost certain to be 2024. With the countdown on, should the industry boost in-house technologies or look to outsource — particularly when T+1 is not far, far away?
Image: mongkol/stock.adobe.com
“A long time ago, in a galaxy far, far away” instinctively feels like a good way to start a story about the arrival of T+1 in the world’s major trading markets — a story that feels like it started a long, long time ago.
For long-time international financial market participants and observers, there is a suspicion that the story will go on forever, with endless bifurcations, prequels and sequels. Of course, this introduction is from a pre-internet filmic fiction. At the time this film hit the big screen, the settlement of trades and other stock movements were conducted through back-office processing, taking place on a batch basis.
Young people of today, brought up with iPhones, Spotify and Netflix, find it hard to imagine a time when the internet was nothing more than science fiction. The settlement of trades and other stock movements being completed in this way is inconceivable. It’s likely, then, that they will not bat an eyelid at the thought of the looming arrival of T+1 in the US and Canada, other than to ask: “why was it not done earlier?”
The US and Canada will not, of course, be the first, as Pardeep Cassells, head of securities and claims products at AccessFintech, reminds us.
“India is doing a phased-in go live on T+1 and it has been pretty successful so far,” she notes. “The push for T+1 in the US and Canadian markets is now on,” she adds. This push is not, she stresses, as a result of regulatory change, as many references to it suggest.
“The markets themselves are driving change, working to their own timetable, which makes it more likely to succeed. The first half of 2024 is the target. Not everyone wants it, however, and some firms will struggle more than others as the move from T+2 means the loss of around 90 per cent of pre-settlement investigation time.”
Faced with the need to invest in more technology to do more straight-through processing (STP), organisations have a choice to make. Do they boost in-house technology? Or do they outsource?
Cassells outlines: “Reinforcing in-house capacity presents an interesting puzzle, and the picture is complicated by a general loss of interest in working in finance. This is reflected in post-pandemic staff departures, especially at junior levels. Bringing in more staff to manage fails all day is a difficult sell, as it is not the most interesting job.
“Outsource it, and it is someone else’s problem. We are seeing asset managers in the US consider the issue and decide to sign up to outsourcing even where it is not their current model.”
Another option she identifies is to make the work interesting through automation, enabling talent to move from fails management to tackling issues up front.
John Abel, executive director of clearance and settlement product management at DTCC, mirrors Cassell’s points.
“Implementing or improving post-trade automation is a crucial part of preparing for T+1, as it enables firms to accelerate the trade lifecycle,” he says. “DTCC’s priority is to help market participants prepare for the change through a series of educational initiatives in collaboration with the Securities Industry and Financial Markets Association and the Investment Company Institute.
“These efforts include leading industry working groups, conducting industry webinars, issuing whitepapers and implementation playbooks, and as delivering guidance on testing with DTCC. We are well prepared to meet the 2024 deadlines and are currently focused on preparing the industry for the shortened settlement cycle.”
T+1: The theory of everything
Will the nature of T+1 be limited due to different timezones, or will there be knock-on effects elsewhere? Any trade in US equities, corporate and municipal bonds or unit investment trusts settling in the US will be subject to the move to T+1. The Canadian market will move to T+1 on the same day as the US. Other regions, such as the UK and Europe, have initiated formal projects to explore a move to T+1 in their respective markets.
For its part, the UK Government announced the launch of an accelerated settlement taskforce last December to explore whether, and how, the country could move to shortened settlement cycles and a distributed ledger technology-based system.
“The move to T+1 will impact non-US firms that invest into the US market,” says Abel. “These firms will need to be aware of the condensed timelines associated with T+1 settlement and determine how they will address time-sensitive workflows and processes. Critical to achieving T+1 will be the allocation, confirmation and affirmation processes for institutional trades to take place on trade date, also known as same day affirmation (SDA). This is most likely to occur if post-trade processes are fully automated.
“Market participants should assess these processes now, and can turn to automated solutions either in-house or from third-party providers which enable them to achieve same-day affirmation and achieve the T+1 settlement cycle.”
Market participants most impacted by the move to T+1 will be firms who have a high level of post-trade manual processing and institutions where industry standards and solutions have failed to be adopted. While T+1 may require certain market participants to increase their levels of automation, the benefits of doing so may extend far beyond meeting a shortened settlement cycle.
“By switching from manual to automated processes for allocation, confirmation and central matching, firms can significantly reduce post-trade exceptions and costly reconciliation efforts, as well as reduce operational risk,” says DTCC’s Abel.
“However, in order to take advantage of these benefits and be prepared for T+1, firms that currently have low levels of automation need to start their preparations now to ensure they have time for testing ahead of T+1 implementation,” he cautions.
Moving through the cosmos
Chris Rowland, senior vice president and head of custody product at State Street, indicates: “T+1 implementation is a heavier lift compared to the previous move to T+2 in 2017. Sufficient time to implement is therefore critical. Planning focus in recent months has been on completion of deep-dive internal impact assessments, defining IT and operating model changes. T+1 will require buy-side firms and their partners, including custodians, investing in the US and Canadian markets to significantly streamline a large number of processes across the typical trade cycle.”
There are several key operational change effects that need addressing for DTCC’s internal operating model, something which must be done in collaboration with its clients and asset managers, says Abel.
Considering asset servicing, particularly corporate action activities, ex-date calculation for regular way dividend processing will shift from one day before the record date in a T+2 settlement cycle to the same day as the record date in a T+1 settlement cycle.
Other key operational change effects that need addressing for DTCC’s internal operating model includes affirmations, confirmations and allocations needed on a trade date.
Cut-off time for having affirmed institutional transactions automatically introduced into National Securities Clearing Corporation and DTCC in a T+2 environment is currently 11:30am ET. In a T+1 settlement cycle, the affirmation cut-off time will change to 9:00pm ET on trade date (or T+0), and timely trade allocations will become critical to ensure trade settlement.
“With the compressed settlement timeframe, client trade instruction deadlines will change,” Abel outlines. “We are recommending that clients evaluate their systems and look to add automation wherever possible in their operations, including via consideration of available custodian, vendor and market infrastructure solutions.”
As a result of shortened settlement cycles, custodians will be changing deadlines for instructions, execution and settlement. With these changes in mind, trading platforms may need to be linked to align foreign exchange (FX) execution with security trade settlement. Clients should consider the need to pre-fund for certain scenarios. Abel says: “We expect most FX transactions will be executed for same day value, and automation and STP will be essential for managers to meet the new tightened deadlines.”
To assist managers with automating their current execution processes, State Street Global Markets have automated solutions and products that can help by integrating directly to clients’ order management and trading systems, or setting up standing instructions to execute an FX transaction as needed.
Discussing how T+1 will benefit the buy-side, Ben Pumfrett, head of product and profitability, middle office at RBC Investor & Treasury Services, says: “Outsourcing will allow buy-side firms to leverage service providers’ global operating models and technology investment to maximise automation and the shrinking windows for exception management, without requiring a capital outlay or the time to implement change.”
“Towards the end of 2022, we certainly started to see our clients’ attention switch to the impact of T+1 coming to the US and Canadian markets, with talk of how the UK and Europe could follow suit. In the discussions, the change required for clients to be ready is technology. To support a faster front-to-back workflow, utilising more automation and integrating it into the market utilities available is essential.”
He concludes: “Technology options for the post-execution workflow are now prevalent in the market or accessible via outsourcing.”
For long-time international financial market participants and observers, there is a suspicion that the story will go on forever, with endless bifurcations, prequels and sequels. Of course, this introduction is from a pre-internet filmic fiction. At the time this film hit the big screen, the settlement of trades and other stock movements were conducted through back-office processing, taking place on a batch basis.
Young people of today, brought up with iPhones, Spotify and Netflix, find it hard to imagine a time when the internet was nothing more than science fiction. The settlement of trades and other stock movements being completed in this way is inconceivable. It’s likely, then, that they will not bat an eyelid at the thought of the looming arrival of T+1 in the US and Canada, other than to ask: “why was it not done earlier?”
The US and Canada will not, of course, be the first, as Pardeep Cassells, head of securities and claims products at AccessFintech, reminds us.
“India is doing a phased-in go live on T+1 and it has been pretty successful so far,” she notes. “The push for T+1 in the US and Canadian markets is now on,” she adds. This push is not, she stresses, as a result of regulatory change, as many references to it suggest.
“The markets themselves are driving change, working to their own timetable, which makes it more likely to succeed. The first half of 2024 is the target. Not everyone wants it, however, and some firms will struggle more than others as the move from T+2 means the loss of around 90 per cent of pre-settlement investigation time.”
Faced with the need to invest in more technology to do more straight-through processing (STP), organisations have a choice to make. Do they boost in-house technology? Or do they outsource?
Cassells outlines: “Reinforcing in-house capacity presents an interesting puzzle, and the picture is complicated by a general loss of interest in working in finance. This is reflected in post-pandemic staff departures, especially at junior levels. Bringing in more staff to manage fails all day is a difficult sell, as it is not the most interesting job.
“Outsource it, and it is someone else’s problem. We are seeing asset managers in the US consider the issue and decide to sign up to outsourcing even where it is not their current model.”
Another option she identifies is to make the work interesting through automation, enabling talent to move from fails management to tackling issues up front.
John Abel, executive director of clearance and settlement product management at DTCC, mirrors Cassell’s points.
“Implementing or improving post-trade automation is a crucial part of preparing for T+1, as it enables firms to accelerate the trade lifecycle,” he says. “DTCC’s priority is to help market participants prepare for the change through a series of educational initiatives in collaboration with the Securities Industry and Financial Markets Association and the Investment Company Institute.
“These efforts include leading industry working groups, conducting industry webinars, issuing whitepapers and implementation playbooks, and as delivering guidance on testing with DTCC. We are well prepared to meet the 2024 deadlines and are currently focused on preparing the industry for the shortened settlement cycle.”
T+1: The theory of everything
Will the nature of T+1 be limited due to different timezones, or will there be knock-on effects elsewhere? Any trade in US equities, corporate and municipal bonds or unit investment trusts settling in the US will be subject to the move to T+1. The Canadian market will move to T+1 on the same day as the US. Other regions, such as the UK and Europe, have initiated formal projects to explore a move to T+1 in their respective markets.
For its part, the UK Government announced the launch of an accelerated settlement taskforce last December to explore whether, and how, the country could move to shortened settlement cycles and a distributed ledger technology-based system.
“The move to T+1 will impact non-US firms that invest into the US market,” says Abel. “These firms will need to be aware of the condensed timelines associated with T+1 settlement and determine how they will address time-sensitive workflows and processes. Critical to achieving T+1 will be the allocation, confirmation and affirmation processes for institutional trades to take place on trade date, also known as same day affirmation (SDA). This is most likely to occur if post-trade processes are fully automated.
“Market participants should assess these processes now, and can turn to automated solutions either in-house or from third-party providers which enable them to achieve same-day affirmation and achieve the T+1 settlement cycle.”
Market participants most impacted by the move to T+1 will be firms who have a high level of post-trade manual processing and institutions where industry standards and solutions have failed to be adopted. While T+1 may require certain market participants to increase their levels of automation, the benefits of doing so may extend far beyond meeting a shortened settlement cycle.
“By switching from manual to automated processes for allocation, confirmation and central matching, firms can significantly reduce post-trade exceptions and costly reconciliation efforts, as well as reduce operational risk,” says DTCC’s Abel.
“However, in order to take advantage of these benefits and be prepared for T+1, firms that currently have low levels of automation need to start their preparations now to ensure they have time for testing ahead of T+1 implementation,” he cautions.
Moving through the cosmos
Chris Rowland, senior vice president and head of custody product at State Street, indicates: “T+1 implementation is a heavier lift compared to the previous move to T+2 in 2017. Sufficient time to implement is therefore critical. Planning focus in recent months has been on completion of deep-dive internal impact assessments, defining IT and operating model changes. T+1 will require buy-side firms and their partners, including custodians, investing in the US and Canadian markets to significantly streamline a large number of processes across the typical trade cycle.”
There are several key operational change effects that need addressing for DTCC’s internal operating model, something which must be done in collaboration with its clients and asset managers, says Abel.
Considering asset servicing, particularly corporate action activities, ex-date calculation for regular way dividend processing will shift from one day before the record date in a T+2 settlement cycle to the same day as the record date in a T+1 settlement cycle.
Other key operational change effects that need addressing for DTCC’s internal operating model includes affirmations, confirmations and allocations needed on a trade date.
Cut-off time for having affirmed institutional transactions automatically introduced into National Securities Clearing Corporation and DTCC in a T+2 environment is currently 11:30am ET. In a T+1 settlement cycle, the affirmation cut-off time will change to 9:00pm ET on trade date (or T+0), and timely trade allocations will become critical to ensure trade settlement.
“With the compressed settlement timeframe, client trade instruction deadlines will change,” Abel outlines. “We are recommending that clients evaluate their systems and look to add automation wherever possible in their operations, including via consideration of available custodian, vendor and market infrastructure solutions.”
As a result of shortened settlement cycles, custodians will be changing deadlines for instructions, execution and settlement. With these changes in mind, trading platforms may need to be linked to align foreign exchange (FX) execution with security trade settlement. Clients should consider the need to pre-fund for certain scenarios. Abel says: “We expect most FX transactions will be executed for same day value, and automation and STP will be essential for managers to meet the new tightened deadlines.”
To assist managers with automating their current execution processes, State Street Global Markets have automated solutions and products that can help by integrating directly to clients’ order management and trading systems, or setting up standing instructions to execute an FX transaction as needed.
Discussing how T+1 will benefit the buy-side, Ben Pumfrett, head of product and profitability, middle office at RBC Investor & Treasury Services, says: “Outsourcing will allow buy-side firms to leverage service providers’ global operating models and technology investment to maximise automation and the shrinking windows for exception management, without requiring a capital outlay or the time to implement change.”
“Towards the end of 2022, we certainly started to see our clients’ attention switch to the impact of T+1 coming to the US and Canadian markets, with talk of how the UK and Europe could follow suit. In the discussions, the change required for clients to be ready is technology. To support a faster front-to-back workflow, utilising more automation and integrating it into the market utilities available is essential.”
He concludes: “Technology options for the post-execution workflow are now prevalent in the market or accessible via outsourcing.”
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