We’re now under 12 months – or as SIFMA’s slightly ominous Countdown Clock shows, 362 days, 16 hours, 15 minutes, and 16 seconds – away from T+1 implementation. And while 12 months may seem like a significant period, time has the unfortunate habit of slipping away quicker than you’d like. For instance, the SEC’s landmark vote to shorten the settlement cycle to T+1 – which seems to sit in the relatively recent memory – came over three and a half months ago now. Firms can no longer put their T+1 preparations in the ‘Deal With Later’ pile, and have to now put their gameplan front and centre.
“We’re at the roll-up-your-sleeves, all-hands-on-deck stage,” said Keith Evans, executive director of the Canadian Capital Markets Association (CCMA), who this week highlighted one of the key remaining concerns for the market ahead of next year’s switch to a shortened settlement cycle.
According to Evans, the CCMA and Canadian participants have been working towards matching details of 90% of trades by 3:59am on T+1, but there are now fears that that deadline could be brought forward. With this in mind, Evans has called for immediate regulatory certainty around the trade-matching deadline to eliminate doubt for firms preparing for next year’s switch.
“With less than a year to go, the interconnected participants in the Canadian capital markets cannot afford to restart planning to meet an earlier trade-matching threshold,” the CCMA said in a statement. “Further delays in confirming the trade-matching deadline will increase T+1 implementation and systemic risk, potentially impacting financial system stability.”
However, as Virginie O’Shea, founder and CEO of Firebrand Research, points out – tweaks to the timeframes and details of certain processes can often be made after the various testing phases. “The usual experience with market structure changes is that practical details are altered once firms have tested their viability,” explained O’Shea, meaning that the CCMA and other market participants may not get the answer to this question for a while yet.
Europe and Asia have some catching up to do
But the concerns don’t stop there. In terms of preparedness, there is a sense that organisations in the US have taken the initiative on T+1 and are on track for go-live – but worries remain for organisations in other regions.
“Our concern lies with the European and Asian firms,” said Michele Pitts, custody product head for Citi’s North America’s strategic initiatives, on The TRADE’s sister publication, Global Custodian’s Smarter Securities podcast. “There is less of a readiness, given the time zone challenges, specific concerns around funding and meeting the affirmation timeframe of 09:00pm on trade day, which is problematic.”
Questions remain over the possibilities in these regions to send instructions on trade date, whether limitations around batch processing may prevent that, and additional knock-on effects that may impact clients further down the chain.
“Broadly speaking, the future of settlement in the [APAC] region is yet to be defined,” explained Lukas Conrad, regional head securities services APAC for SIX Group. “The siloed regulatory framework across the many developed markets in APAC will only add to the complexity. Adjusting to T+1 in the US will be enough of a challenge to work with, but the emergence of additional markets seeking to move T+1 will add significant pressure for local market participants.”
What’s needed is a thorough investigation into these questions, and an engagement across markets and geographies to find suitable solutions. But, as O’Shea notes, “there has been a relatively slow process of engagement thus far” among European and Asian buy-side firms, which will need to be stepped up in the coming months to facilitate a smooth transition to T+1.
Automate to expedite
It has been widely publicised throughout the course of the process, that the key to a successful T+1 transition lies in the automation of manual processes that remain present in the market today.
Val Wotton, managing director, institutional trade processing and president & CEO of the Depository Trust & Clearing Corporation (DTCC) ITC, reaffirmed this point last week in a message to the market, stating: “To meet the accelerated settlement timeframe, it is critical that market participants eliminate manual processes and maximise automation in the post-trade pre-settlement space.”
One aspect of that is the often-poor connectivity and communication between the buy-side, sell-side and custodians throughout the trade cycle, which as James Pike, head of business development at Taskize, points out, is a crucial element needing to be addressed ahead of the transition.
“If there is a problem between the broker and the buy-side organisation, the issue moves from the buy-side down to the custodian and then back up, resulting in a very bilateral process,” Pike says. “These processes can take time, sometimes days or even weeks. It’s therefore crucial to create a process that facilitates the flow of information between all three parties almost simultaneously. This currently doesn’t happen, so it will be a significant shift and a considerable change.”
Elsewhere, the technological requirements for completing trades on a same-day basis are under the microscope for organisations, with manual processes reportedly unviable in a T+1 environment.
The final ruling stated that institutional trades must be allocated, confirmed and affirmed “as soon as is technologically possible and no later than trade date”. Wotton points out that the technology to achieve same-day affirmation (SDA) already exists, and implementation of those technologies “significantly reduces the number of post-trade exceptions as well as costly reconciliation efforts”.
Speaking to Global Custodian earlier this year, Tony Freeman, post-trade expert who sits on the UK’s T+1 taskforce, noted that SDA in the US sits at 68%. While this is likely to have been improved upon since the article was published last month, the figure “needs to be very close to 100% if T+1 is going to work” Freeman said. “It is absolutely clear that batch processing, still prevalent, has to be eliminated because the T+1 window to resolve mismatches no longer exists.”
Whether the industry can achieve those figures in the next 12 months, as well as find solutions for problems not covered in this article – securities lending, FX, corporate actions, for example, which you can read about in our ‘even deeper dive’ by clicking here – we’ll have to wait and see. As we draw closer to May 2024, a lagging market may result in a delayed implementation date – but as yet, that is not something that the SEC and other authorities have publicly discussed. What we do know when it comes to T+1 is that the market will be only as strong as its weakest link, therefore it is incumbent on all participants to take the deadline seriously and prepare accordingly.