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T+1 is Coming: Are You Prepared?
While the transition to T+1 will offer benefits to investors; it also presents potential challenges as the settlement cycle tightens.
Head of Integrated Trading Solutions, Americas
In February 2023, the U.S. Securities and Exchange Commission (SEC) announced that it is transitioning the securities settlement cycle from trade date plus two (T+2) to trade date plus one (T+1), effective May 28, 2024. This announcement was closely followed by Canadian and Mexican regulators, who also proposed new rules to support a transition to T+1, effective May 27, 2024.1 This means that trades executed on a given day must be settled within one business day instead of two, reducing the settlement timeframe by a full business day.
While the shift to T+1 offers wide-ranging benefits to market participants, it also poses several challenges, including a potential impact to liquidity and cash management processes for cross currency transactions, as well as an increased risk for unmatched trades and settlement fails. Many asset managers are well positioned for the move because they have automated systems that allow data to flow in a straight-through processing (STP) environment. Other managers that are more reliant on manual forms of communication, have older systems, or have smaller teams trading in markets outside of the U.S. and Canada, may struggle with the shortened settlement window.
The move to T+1 reinforces the importance of real time data flows, automation and optimal communication. For managers that are unsure how their processes will hold up to the new standards, outsourcing to a service provider that offers a fully integrated trading, FX and settlement service with intra-day SWIFT communications can help their organizations reap the benefits of the transition without having to navigate many of the challenges.
One of the primary drivers of the move to T+1 is to create a more efficient settlement ecosystem to reduce counterparty, market and liquidity risk. Shortening the settlement cycle should reduce the overall risk exposure to unsettled trades and reduce the potential for price movements in the underlying securities during the unsettled trade movement.
Yet the reduced timeframe will require trade-related operations support teams and technology platforms to be more highly effective, co-ordinated and efficient not only on the security side, but also with regard to FX for funding purposes. There will be much less time to repair trade breaks and exceptions to ensure that trades are going to settle. While the impact of the change in North America will be meaningful, essentially removing a few hours, the impact on EMEA and APAC markets will be more significant due to time zone differences. For the settlement of securities with a related cross-currency component, investors will be faced with a compressed settlement window from equity trade execution through to managing the FX funding and repatriation requirements. With a shortened timeline, resolving settlement fails and exemptions becomes more challenging. This may require additional overnight staff to cover North America market hours.
With one fewer day to settle trades, any manager without fully automated processing that provides end-to-end trade lifecycle management will struggle. Minimizing the risk of failed trades and the timely orchestration of trades will require as much straight-through integration as possible from trade execution to settlement.
The move to T+1 will require a fundamental re-evaluation of the clearing, settlement and funding processes that support trade settlement. This can be achieved by implementing an automated mechanism that is linked to the underlying transaction. T+1 marks a turning point for the industry’s drive toward automation. Moving to a shorter settlement cycle offers an opportunity to eliminate manual processes and make investments in technology systems and service providers that support this transition. Firms that engage in automated settlement, clearing and funding processes will be better positioned to emerge successfully from this market shift. Those that still rely on more manual methods of trade communication will soon find themselves struggling to keep up.
Typically, firms are slower to invest in back-end solutions than front-end, client facing solutions. Those who have not made the necessary investments over time on back-end technologies will feel the biggest impact from a shortened settlement cycle and may find that they need to quickly ramp up their systems and staff to be able to meet the requirements of a shortened settlement cycle. Investing in automation tools may prove to be a significant cost for some organizations navigating the T+1 transition.
As the industry closes in on the T+1 transition deadlines, it may be helpful for asset managers to think through their preparedness. The following questions are important to consider.
- Is your trading process synced with your foreign exchange?
- Have you reviewed your standard settlement instructions (SSIs)?
- How many manual processes currently exist within your trade settlement process?
- Can these processes be easily transitioned to a same day or next day settlement?
- Is your trade confirmation, allocation and affirmation process automated?
- Are your brokers, custodians and other providers able to accommodate the T+1 environment?
- Are your trading teams involved in the preparation and engaged in planning?
- Do you have a formal plan to test your preparedness for T+1?
- Are you positioned to access global liquidity and resources?
If the answer to any of these questions is ‘no’, firms will want to seek out opportunities to streamline their trade execution and settlement. Outsourcing is one solution to meet this shorter timeframe, increase efficiencies and optimize performance from trade execution through to foreign exchange and settlement. Selecting a service provider that offers integrated, multi-asset trading and settlement services with intra-day SWIFTing means they are already equipped to meet this shortened settlement window, making this a seamless transition. Having a follow-the- sun, 24/6 operating model means trades are typically matched and instructed in the market within 1-2 hours of order completion, meeting local T+0/T+1 matching deadlines; funding requirements are met through corresponding FX being performed as close to trade execution as possible and ultimately minimizing settlement issues.
In addition, selecting an outsourced service provider who has invested in new technology and utilizes straight- through processing can help to reduce risk. This enables them to process trades with greater speed, identify and resolve exceptions more quickly, and support firms that have manual processes.
As the industry moves to a shortened settlement window, it is vital to analyze and prepare for T+1 impacts, not only to inform the implementation of change but also to identify potential gaps and solutions.
What is clear is that with compressed timeframes, trading solutions will have to be highly automated and globally focused. Despite the challenges, T+1 will unlock new opportunities for the industry. The greater drive towards efficiency should improve liquidity and collateral management, while reducing risk in the market.
Head of Integrated Trading Solutions, Americas, Northern Trust
September 14, 2023
In an evolving landscape, asset managers are seeking outsourcing partners that can provide strength and stability.
June 23, 2023
Preparing for the May 2024 T+1 securities settlement cycle compression in the United States requires careful thought, especially for firms trading US stocks outside the US in a non-USD base currency. In this article, Northern Trust’s Kia Oboudiyat, Chief Strategy Officer, Global Foreign Exchange and Gerard Walsh, Global Head of Capital Markets Client Solutions, discuss trading and trade-related FX as part of the same solution.
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