The road to T+1
15 nov 2023
State Street’s Chris Rowland discusses how APAC firms must amend processes to keep up with the US and Canada’s move to a T+1 settlement cycle
Image: State Street
The investment industry has only a few months to get ready for the transition from a T+2 to a T+1 settlement cycle in the US and Canadian markets. The US Securities and Exchange Commission (SEC) confirmed Tuesday 28 May 2024 — the day after the Memorial Day holiday — as the implementation date. The SEC’s final rule provides an extra two months of preparation time from the original draft rule proposal’s compliance date of 31 March, although the industry had broadly advocated for a 3 September transition. Meanwhile, the Canadian market confirmed that it will transition on Monday 27 May: a day earlier than the US, since it does not have the benefit of a long weekend.
There are additional Asia Pacific (APAC) region impact considerations for asset managers and owners, which will require their attention if they are to successfully meet the new truncated deadlines under T+1.
Upcoming changes to affirmation cutoff time
The Depository Trust and Clearing Corporation (DTCC) cutoff time for having affirmed institutional transactions automatically introduced into the National Securities Clearing Corporation (NSCC) and Depository Trust Company (DTC) in the T+2 environment is currently 11:30 a.m. ET. For the T+1 settlement cycle, the affirmation cutoff time will change to 9:00 p.m. ET on trade date. Today, under T+2, the affirmation process is usually done by global custodians on behalf of the asset managers or owners in the APAC region, following the receipt of trade instructions. It is a time-consuming process for the custodian to match the received instructions to the broker confirmations. While we will continue to support this model under T+1, it will require asset managers and owners to apply for their own DTCC institutional identification.
In addition, technology exists that can make the affirmation process more-or-less instantaneous (for example, the DTCC’s Central Trade Manager and Match to Instruct products). In order to meet the tighter deadlines, asset managers and owners should consider adopting such technologies to perform the affirmation process on behalf of their clients.
Tight deadlines for allocation processes
In order to meet the affirmation deadline, brokers will have to provide allocations significantly earlier, concluding the process within minutes — half an hour maximum — of the trade being executed. In the current trading environment, this process takes hours. Brokers and asset managers in the APAC region should invest in order management technologies to ensure that they have adequate automated systems in place to accommodate the tighter deadline for their allocation processes. This will be an essential element of the trading institutions’ due diligence as part of the readiness preparations for T+1.
Automated FX processes
For investors with base currencies different from the US dollar or the Canadian dollar, a timely FX transaction will be needed to ensure settlement of the security trade, purchase equity funding currency or repatriate back to base currency. Though FX can be arranged at any point during the security life cycle, it is conventional to instruct the FX after security affirmation to allow for accurate funding for the underlying security trade. We believe automation of the FX execution process will be paramount in meeting these new shortened deadlines.
APAC investors will generally need to execute the FX by T+1 for same-day value. Considering the same-day value liquidity, investors are encouraged to adopt automated FX instruction and workflow solutions. This connects the FX to the securities trade instruction automatically, so that funding can be executed in a timely manner.
Partnering with external providers
APAC- and EMEA-based investors who rely solely on local trade processing resources should consider if their existing infrastructure can support the new workflows required for trading in US and Canadian securities in a T+1 environment. Identifying and addressing gaps in the process by the cutoff date will be dependent on the resources available internally. Alternatively, investors can look to partner with external providers that are already set up to meet these requirements.
The solutions to the challenges presented by the shift to T+1 are predominantly technological in nature. The existing T+2 scenario enables both investment institutions and their various service providers — brokers, investment managers and custodians — a degree of leeway for performing tasks manually. With the new compressed time frames there will be no room for manual processing. Asset managers and owners need to evaluate their own technology stack and those offered by third-party vendors in order to eliminate the tedious back-and-forth in process flows.
There are additional Asia Pacific (APAC) region impact considerations for asset managers and owners, which will require their attention if they are to successfully meet the new truncated deadlines under T+1.
Upcoming changes to affirmation cutoff time
The Depository Trust and Clearing Corporation (DTCC) cutoff time for having affirmed institutional transactions automatically introduced into the National Securities Clearing Corporation (NSCC) and Depository Trust Company (DTC) in the T+2 environment is currently 11:30 a.m. ET. For the T+1 settlement cycle, the affirmation cutoff time will change to 9:00 p.m. ET on trade date. Today, under T+2, the affirmation process is usually done by global custodians on behalf of the asset managers or owners in the APAC region, following the receipt of trade instructions. It is a time-consuming process for the custodian to match the received instructions to the broker confirmations. While we will continue to support this model under T+1, it will require asset managers and owners to apply for their own DTCC institutional identification.
In addition, technology exists that can make the affirmation process more-or-less instantaneous (for example, the DTCC’s Central Trade Manager and Match to Instruct products). In order to meet the tighter deadlines, asset managers and owners should consider adopting such technologies to perform the affirmation process on behalf of their clients.
Tight deadlines for allocation processes
In order to meet the affirmation deadline, brokers will have to provide allocations significantly earlier, concluding the process within minutes — half an hour maximum — of the trade being executed. In the current trading environment, this process takes hours. Brokers and asset managers in the APAC region should invest in order management technologies to ensure that they have adequate automated systems in place to accommodate the tighter deadline for their allocation processes. This will be an essential element of the trading institutions’ due diligence as part of the readiness preparations for T+1.
Automated FX processes
For investors with base currencies different from the US dollar or the Canadian dollar, a timely FX transaction will be needed to ensure settlement of the security trade, purchase equity funding currency or repatriate back to base currency. Though FX can be arranged at any point during the security life cycle, it is conventional to instruct the FX after security affirmation to allow for accurate funding for the underlying security trade. We believe automation of the FX execution process will be paramount in meeting these new shortened deadlines.
APAC investors will generally need to execute the FX by T+1 for same-day value. Considering the same-day value liquidity, investors are encouraged to adopt automated FX instruction and workflow solutions. This connects the FX to the securities trade instruction automatically, so that funding can be executed in a timely manner.
Partnering with external providers
APAC- and EMEA-based investors who rely solely on local trade processing resources should consider if their existing infrastructure can support the new workflows required for trading in US and Canadian securities in a T+1 environment. Identifying and addressing gaps in the process by the cutoff date will be dependent on the resources available internally. Alternatively, investors can look to partner with external providers that are already set up to meet these requirements.
The solutions to the challenges presented by the shift to T+1 are predominantly technological in nature. The existing T+2 scenario enables both investment institutions and their various service providers — brokers, investment managers and custodians — a degree of leeway for performing tasks manually. With the new compressed time frames there will be no room for manual processing. Asset managers and owners need to evaluate their own technology stack and those offered by third-party vendors in order to eliminate the tedious back-and-forth in process flows.
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