A new report from Torstone Technology and Chartis Research has outlined the key challenges associated with the acceleration of settlement cycles in the US and Canada to T+1 in May 2024; with system readiness, interoperability and regulatory compliance highlighted as the main concerns.
To ensure a smooth transition to T+1 settlements, the report emphasised that systems across entities including broker-dealers, prime brokers and clearing houses will require upgrades to meet the demands of an accelerated settlement cycle.
Without this, existing infrastructure may not be able to handle increased transactional velocity, which could ultimately lead to operational bottlenecks, system crashes and trade settlement delays.
Given the limited time until the implementation of T+1 in May next year, the report highlighted that a general feeling exists among US and Canada-based broker-dealers that existing technical infrastructure will suffice. However, it noted that any movement toward T+0 in the future will force firms to speed up their infrastructure platform upgrades.
Read more: T+1 settlement: The seismic post-trade change impacting the trading desk
For the implementation of T+1 to be successful, the report also stressed the importance of coordination between the buy- and sell-side, as well as interoperability.
From May next year, buy-side asset managers will be required to allocate, affirm and confirm all trades on T+0, an acceleration from existing catch-up periods of T+1, which will no longer be feasible. Foreign investors will also have to bring in all FX transactions for a T+1 cash settlement.
The report warned that the discrepancy in settlement cycles could potentially pose significant risks for asset managers with exposure to different markets, alongside addressing that with the various moving parts associated with a trade, communication breakdowns will be more likely to occur, which could lead to settlement delays and higher fail rates.
Elsewhere in the report, regulatory compliance was highlighted as a key challenge, given that the adoption of T+1 will see the regulatory landscape continue to evolve. This will leave market participants with new rules and regulation to comply with.
Following the adoption of T+1, asset managers will be subject to increased trade-allocation tracking, data storage and reporting requirements. Noncompliance with these factors could potentially lead to targeted regulatory mandates to force firms to increase their automation or be faced with penalties.
“Moving to T+1 from T+2 in the US and Canada compared to previous moves is definitely a step up in complexity. Buy-side trade affirmation/confirmation obligations are significant and the sell-side and buy-side need to be in closer synch,” said Jay Wolstenholme, research director at Chartis.
“For the May 2024 conversion date, much of existing technology will have to hold, but it’s definitely the catalyst for both buy-side and sell-side to re-evaluate technology reengineering to not only meet this deadline but also inevitable future settlement modifications.”