History in the making
Nov 2024
With T+0 already being lined up as the next obvious step, Brian Steele, DTCC managing director, president, Clearing and Securities Services, considers the significance and benefits of the US move to T+1
Image: DTCC
The preparations leading up to a shortened settlement cycle of T+1 in North America were careful and comprehensive, and while practically invisible to the end investor, this was a major global undertaking that touched nearly every corner of the financial industry.
For more than three years, the Depository Trust & Clearing Corporation (DTCC) partnered with key industry stakeholders, including the Securities Industry and Financial Markets Association (SIFMA) and the Investment Company Institute (ICI), to lead a transformative initiative that has now strengthened the global financial market structure, reduced counterparty risk and improved capital efficiency and liquidity in securities transactions.
Accelerating the settlement cycle to T+1 required industry participants to migrate to more efficient ways of transaction processing, including further automation and the adoption of industry standards. And, in addition to improving each firms’ individual processing, these advances had the added benefit of improving market and settlement efficiency for the entire industry. DTCC is proud of how our collective and coordinated work with the industry and regulators ensured a successful and seamless transition for the US market to T+1 on 28 May 2024.
Now that we are a few months into T+1, the dust has settled, and the financial services industry is functioning well under the ‘new normal’ of settling transactions just one day after the trade for US cash equities, corporate debt, and unit investment trusts. At DTCC, we have collected data and feedback from clients, as well as insights from our own clearing and settlement systems, to enable us to take a step back and assess how a shortened settlement cycle of T+1 is delivering on the benefits and promises of greater operational efficiencies in this multi-trillion dollar securities market.
Generating industry-wide savings
One of the key industry benefits promised by T+1 was the decrease in clearing fund requirements. From day one we saw that, because T+1 reduced risk, which immediately lowered margin requirements and thus saved money, freeing up member capital. The move also reduced settlement latency, which now makes cash and securities available to investors sooner. By the numbers: since the transition to T+1, the National Securities Clearing Corporation (NSCC) clearing fund decreased 25 per cent from the previous month average of US$12.2 billion in a T+2 environment, to US$9.1 billion — a savings of more than US$3 billion.
Looking at this quarterly, the clearing fund requirements are down even more dramatically, from US$12.8 billion to US$9.1 billion, which represents a saving of US$3.7 billion (29 per cent). This extra liquidity creates opportunities for clients to invest in other activities to strengthen their organisations and achieve their business goals and objectives, and these improvements have provided end investors with better utilisation of their assets.
T+1 drove significant operational efficiency
T+1 was the catalyst needed across counterparties to take a hard look at modernisation and process redesign, and to reassess innovative technologies and solutions. An accelerated settlement timeline added pressure across all parties in the ecosystem, and one of the biggest opportunities firms took away was reduced operational risk through modernisation. T+1 required market participant firms to adapt their operations to ensure they would have adequate time to allocate, confirm and affirm trades by 21:00 EST on trade date, the T+1 DTC affirmation cutoff. As of January 2024, DTCC data showed only 73 per cent of all trades were affirmed by 21:00 EST on trade date. After T+1 implementation, affirmation rates peaked at 96 per cent, and today are averaging around 95 per cent — all without a material increase in fails.
This progress is the direct result of the incredible work that firms put in to automate post-trade processes, many leveraging DTCC’s Central Trade Matching Platform (CTM) solution, and its Match to instruct (M2i) workflow which leverages CTM, ALERT, and TradeSuite ID together to automatically trigger trade affirmation and delivery to DTC for final settlement. Prior to T+1, this was an inefficient part of the trade process that had traditionally taken a backseat to other priority front office investments. The adoption of CTM’s M2i workflow has been a critical enabler to achieving T+1 settlement. Despite the concerns that the number of transaction failures could increase in a tighter timeframe, especially in Asia, we can see in the data there was no rise in failed trades.
Preparation and testing were key
We prepared extensive testing cycles and schedules, with new DTCC’s test environments. We provided clients with instructions on how to connect to these test environments, as well as suggested test scenarios to run through their own T+1 test plans. We know that preparing for T+1 drove significant technology modernisation. And we know that the careful and thoughtful preparation, active testing, widespread communications, and industry-wide collaboration with the industry and clients over the past three years proved to be essential to a smooth transition, providing us with many observations that can be applied to other sweeping industry initiatives.
Reduced risk and improved industry resilience
Accelerating settlement requires careful consideration, industry coordination and a balanced approach to avoid creating capital inefficiencies and introducing new, unintended market risks. While the markets have been smooth since the T+1 transition weekend, we know unexpected volatility and market risk events can arise at any time. In a credit risk event, under T+1, there are now fewer unsettled trades still sitting in the pipeline, allowing a quicker resolution, and reducing overall market risk.
Removing one additional day from the settlement cycle was a seismic shift in the functioning of the equities markets. In comparison, the industry transition from T+3 to T+2 in 2017, while challenging, was less complex because the applicable timeframes were not as compressed as they are under T+1. For instance, in a T+1 environment, the window from the point of execution to settlement narrows from 19 hours to just five hours, which demands a higher level of coordination between the global, interconnected systems that sit at the heart of the marketplace. This compressed timeframe leaves less room for error, which is why firms had to leverage solutions to further automate their post-trade processes and eliminate manual or third-party involvement. Doing so paves the way to settlement finality and supports faster exception resolution — even when there are volume fluctuations.
At the same time, we also encourage firms to review and enhance their business continuity and contingency plans to ensure their continued ability to address any challenges and meet settlement deadlines. DTCC will continue to provide elevated support and transparency to keep industry stakeholders and regulators informed on T+1’s progress and we will continue to partner with our clients to uncover additional ways of improving resiliency in a T+1 operating environment, including considering additional market structure changes that may benefit the industry by increasing operational efficiency and meeting potential future accelerated settlement cycles. We all need to remain focused on identifying additional opportunities to increase resiliency in the market.
T+1 is driving accelerated settlement around the world
T+1 was not just a settlement issue — it touched all parties in a trade’s lifecycle. It was also a global event, impacting investors accessing North American markets. The US move to T+1 has quickened the move to shorter settlement cycles around the world.
Today, approximately 55 per cent of the market globally settle on a T+1 cycle, with Canada, Mexico, Argentina, Jamaica, and Peru, also having moved to T+1 in May 2024. Currently, other regions are coalescing on implementation dates in 2027 and 2028, while Australia is aiming for 2030. Once completed, we will see approximately 85-90 per cent of global markets activity settling T+1. There is an appreciation that settlement flows differ in APAC, UK, and Europe, which present their own complexities. DTCC is actively engaged in both the UK and European Industry T+1 Task Forces. We have also met with several APAC CSDs/CCPs (SGX, ASX, HKEX) and have responded to the ASX Australia T+1 Paper.
We look forward to helping support other markets in their planning and preparations for accelerated settlement. While it is too early to predict how quickly this may happen or whether these other global markets will choose to move together, one thing is certain — many jurisdictions are focused on achieving the benefits that come with accelerated settlement cycles, including new efficiencies and capital and cost reductions.
This is not necessarily the end state
The question we often get is: “Now that the industry has achieved T+1, when will we move to T+0?” But that is a much thornier issue to consider. Real-time settlement is a simple technical solution, but an extremely complicated market structure change. With real-time settlement in today’s market structure, the entire industry — clients, brokers, and investors — lose the liquidity and risk-mitigating benefit of netting, and that is particularly critical during times of heightened volatility and volume. While the move from T+3 to T+2 to T+1 was a relatively linear evolution, the industry has many complex issues to assess and address before even thinking of T+0, as such a move could have the unintended effect of eliminating the enormous benefits and cost savings of multilateral netting.
For more than three years, the Depository Trust & Clearing Corporation (DTCC) partnered with key industry stakeholders, including the Securities Industry and Financial Markets Association (SIFMA) and the Investment Company Institute (ICI), to lead a transformative initiative that has now strengthened the global financial market structure, reduced counterparty risk and improved capital efficiency and liquidity in securities transactions.
Accelerating the settlement cycle to T+1 required industry participants to migrate to more efficient ways of transaction processing, including further automation and the adoption of industry standards. And, in addition to improving each firms’ individual processing, these advances had the added benefit of improving market and settlement efficiency for the entire industry. DTCC is proud of how our collective and coordinated work with the industry and regulators ensured a successful and seamless transition for the US market to T+1 on 28 May 2024.
Now that we are a few months into T+1, the dust has settled, and the financial services industry is functioning well under the ‘new normal’ of settling transactions just one day after the trade for US cash equities, corporate debt, and unit investment trusts. At DTCC, we have collected data and feedback from clients, as well as insights from our own clearing and settlement systems, to enable us to take a step back and assess how a shortened settlement cycle of T+1 is delivering on the benefits and promises of greater operational efficiencies in this multi-trillion dollar securities market.
Generating industry-wide savings
One of the key industry benefits promised by T+1 was the decrease in clearing fund requirements. From day one we saw that, because T+1 reduced risk, which immediately lowered margin requirements and thus saved money, freeing up member capital. The move also reduced settlement latency, which now makes cash and securities available to investors sooner. By the numbers: since the transition to T+1, the National Securities Clearing Corporation (NSCC) clearing fund decreased 25 per cent from the previous month average of US$12.2 billion in a T+2 environment, to US$9.1 billion — a savings of more than US$3 billion.
Looking at this quarterly, the clearing fund requirements are down even more dramatically, from US$12.8 billion to US$9.1 billion, which represents a saving of US$3.7 billion (29 per cent). This extra liquidity creates opportunities for clients to invest in other activities to strengthen their organisations and achieve their business goals and objectives, and these improvements have provided end investors with better utilisation of their assets.
T+1 drove significant operational efficiency
T+1 was the catalyst needed across counterparties to take a hard look at modernisation and process redesign, and to reassess innovative technologies and solutions. An accelerated settlement timeline added pressure across all parties in the ecosystem, and one of the biggest opportunities firms took away was reduced operational risk through modernisation. T+1 required market participant firms to adapt their operations to ensure they would have adequate time to allocate, confirm and affirm trades by 21:00 EST on trade date, the T+1 DTC affirmation cutoff. As of January 2024, DTCC data showed only 73 per cent of all trades were affirmed by 21:00 EST on trade date. After T+1 implementation, affirmation rates peaked at 96 per cent, and today are averaging around 95 per cent — all without a material increase in fails.
This progress is the direct result of the incredible work that firms put in to automate post-trade processes, many leveraging DTCC’s Central Trade Matching Platform (CTM) solution, and its Match to instruct (M2i) workflow which leverages CTM, ALERT, and TradeSuite ID together to automatically trigger trade affirmation and delivery to DTC for final settlement. Prior to T+1, this was an inefficient part of the trade process that had traditionally taken a backseat to other priority front office investments. The adoption of CTM’s M2i workflow has been a critical enabler to achieving T+1 settlement. Despite the concerns that the number of transaction failures could increase in a tighter timeframe, especially in Asia, we can see in the data there was no rise in failed trades.
Preparation and testing were key
We prepared extensive testing cycles and schedules, with new DTCC’s test environments. We provided clients with instructions on how to connect to these test environments, as well as suggested test scenarios to run through their own T+1 test plans. We know that preparing for T+1 drove significant technology modernisation. And we know that the careful and thoughtful preparation, active testing, widespread communications, and industry-wide collaboration with the industry and clients over the past three years proved to be essential to a smooth transition, providing us with many observations that can be applied to other sweeping industry initiatives.
Reduced risk and improved industry resilience
Accelerating settlement requires careful consideration, industry coordination and a balanced approach to avoid creating capital inefficiencies and introducing new, unintended market risks. While the markets have been smooth since the T+1 transition weekend, we know unexpected volatility and market risk events can arise at any time. In a credit risk event, under T+1, there are now fewer unsettled trades still sitting in the pipeline, allowing a quicker resolution, and reducing overall market risk.
Removing one additional day from the settlement cycle was a seismic shift in the functioning of the equities markets. In comparison, the industry transition from T+3 to T+2 in 2017, while challenging, was less complex because the applicable timeframes were not as compressed as they are under T+1. For instance, in a T+1 environment, the window from the point of execution to settlement narrows from 19 hours to just five hours, which demands a higher level of coordination between the global, interconnected systems that sit at the heart of the marketplace. This compressed timeframe leaves less room for error, which is why firms had to leverage solutions to further automate their post-trade processes and eliminate manual or third-party involvement. Doing so paves the way to settlement finality and supports faster exception resolution — even when there are volume fluctuations.
At the same time, we also encourage firms to review and enhance their business continuity and contingency plans to ensure their continued ability to address any challenges and meet settlement deadlines. DTCC will continue to provide elevated support and transparency to keep industry stakeholders and regulators informed on T+1’s progress and we will continue to partner with our clients to uncover additional ways of improving resiliency in a T+1 operating environment, including considering additional market structure changes that may benefit the industry by increasing operational efficiency and meeting potential future accelerated settlement cycles. We all need to remain focused on identifying additional opportunities to increase resiliency in the market.
T+1 is driving accelerated settlement around the world
T+1 was not just a settlement issue — it touched all parties in a trade’s lifecycle. It was also a global event, impacting investors accessing North American markets. The US move to T+1 has quickened the move to shorter settlement cycles around the world.
Today, approximately 55 per cent of the market globally settle on a T+1 cycle, with Canada, Mexico, Argentina, Jamaica, and Peru, also having moved to T+1 in May 2024. Currently, other regions are coalescing on implementation dates in 2027 and 2028, while Australia is aiming for 2030. Once completed, we will see approximately 85-90 per cent of global markets activity settling T+1. There is an appreciation that settlement flows differ in APAC, UK, and Europe, which present their own complexities. DTCC is actively engaged in both the UK and European Industry T+1 Task Forces. We have also met with several APAC CSDs/CCPs (SGX, ASX, HKEX) and have responded to the ASX Australia T+1 Paper.
We look forward to helping support other markets in their planning and preparations for accelerated settlement. While it is too early to predict how quickly this may happen or whether these other global markets will choose to move together, one thing is certain — many jurisdictions are focused on achieving the benefits that come with accelerated settlement cycles, including new efficiencies and capital and cost reductions.
This is not necessarily the end state
The question we often get is: “Now that the industry has achieved T+1, when will we move to T+0?” But that is a much thornier issue to consider. Real-time settlement is a simple technical solution, but an extremely complicated market structure change. With real-time settlement in today’s market structure, the entire industry — clients, brokers, and investors — lose the liquidity and risk-mitigating benefit of netting, and that is particularly critical during times of heightened volatility and volume. While the move from T+3 to T+2 to T+1 was a relatively linear evolution, the industry has many complex issues to assess and address before even thinking of T+0, as such a move could have the unintended effect of eliminating the enormous benefits and cost savings of multilateral netting.
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