Gary Gensler’s foreboding message for the market ahead of the US shift to T+1 on Tuesday indicated a philosophical perspective on the massive structural change for the industry, however this is a perhaps overly simplistic message, lacking some sympathy for the pragmatic side of the process.
Gary Gensler
“Shortening the settlement cycle will help the markets because time is money and time is risk,” said US Securities and Exchange Commission (SEC) chair, Gensler, speaking in the days leading up to the official shift, adding: “It will make our market plumbing more resilient, timely, and orderly. Further, it addresses one of the four areas the staff recommended the Commission address in response to the GameStop stock events of 2021.”
But how is the market doing now that the US’ shift to T+1 has moved from theory to reality?
Market sentiment
Larry Tabb, director of market structure research at Bloomberg Intelligence highlighted that though Tuesday was a big day for US markets, “significant” complications are at the fore, specifically “around the movement of currencies (which will continue to take two days); how institutional investors execute larger orders; the borrowing and lending of securities; how ETFs that span borders are created and redeemed; and how corporate actions (corporate dividends and stock splits) are managed”.
He further added that though preparations have been in the works for some time, Bloomberg Intelligence still does not expect everyone to be fully prepared.
Read more: UBS AM’s Lynn Challenger on adapting to T+1
“The level of failed transactions will increase and possibly double or triple, we expect larger asset managers, especially global ones, will need to borrow more funds to fulfil their settlement obligations, and financial institutions operational staffs will need to work longer hours, to ensure that accelerated cut off times are met, and if not, manage the level of same day cash and securities movements needed.
Speaking to the tangible negatives, Tabb asserted that Bloomberg’s estimate is that additional borrowing, funding and settlement expenses will cost the industry around $8 billion on day one (if annualised). Despite this however, he added that the full bill would not necessarily equal this as institutions are set to solve the majority of their issues within weeks or months.
On a more optimistic note, the Securities Industry and Financial Markets Association (SIFMA) is upbeat about the progress of the transition so far.
In an announcement this week, Tom Price, managing director and head of technology, operations, and business continuity, asserted: “SIFMA’s T+1 Command Center is fully engaged with the broad financial services industry, discussing among the designated participants such topics as conversion status information, transparency into the activity of other participants, and issue identification and socialisation.
“We are encouraged by the feedback from the industry. The transition is moving forward.”
Read more: T+1 testing progressing well despite “minor setup issues,” finds DTCC
Jesse Forster, who leads equity market structure research at Coalition Greenwich, highlighted just today that though initially only 9% of sell-side electronic equities professionals expected a smooth T+1 rollout, perhaps those views should be taken with a grain of salt now that we are in the midst of change.
“Over a quarter of respondents at banks [in a previous Coalition Greenwich study] expected the transition to be delayed or postponed, with only 6% of nonbank broker-dealers agreeing. Clearly, the majority was right this time.”
Forster added: “In a shocking twist, while just a few are concerned about their own desk’s preparedness, many more are worried about everyone else, a fifth are concerned about other brokers, over a third about the buy-side, and over a quarter about trading technology platforms. In other words, the sell-side thinks there will be issues, but it will be someone else’s fault. Hedging is their strong suit, after all.”
The providers’ perspective
John Bevil, senior solutions manager at Xceptor, explained that after what has effectively been a year and a half lead time, it would be a major feat for the shift to T+1 to pass without incident.
“Overall I feel the larger players will be relatively well prepared, but there will be laggards making it a bumpy ride. It is anticipated that major custodians and asset managers have embraced the runway of process and technology changes required to meet the reduced settlement timelines (for now at least!)
“[…] it cannot be said that all participants have been wholly invested in this journey to optimise capital efficiencies and reduce the risk of settlement failure, the buy side in-particular, and firms seated away from the North American epicentre sight change management and unintended model challenges, which have fuelled additional costs for them to do business, and continue to articulate a struggle to see the true benefit to them.”
Looking at some of the medium term effects, Bevil expects a rebalancing or retrospective look which will include upgrades to technology and processes: “Corrective lessons would have been learned, market performance (match rates, fails, etc) will be analysed to the nth degree, and technology and automation will be more tailored to the initial challenges, with solutions reimagined solving for inefficiencies.”
Commenting on the how T+1 will impact operations, Tiago Vega, chief executive at Aurum Solutions, highlighted the “big headache” facing technology and operations teams specifically.
“Put yourself in the shoes of back-office staff; under T+2 you had an extra day to fix things like bugs or glitches. Now, under the new compressed settlement environment, you’ll be in a race against time to fix these problems. These staff will be under significantly more pressure to meet tighter deadlines, creating a higher risk of mistakes associated with human error.
“I suspect that many firms will have already started to automate manual processes to help streamline operations and minimise this risk. If they haven’t, they will need to do so quickly to meet the demands of T+1.”
Alex Knight, head of EMEA at Baton Systems, echoed this sentiment, also sympathising with the “tough ride” that is facing those looking at working longer hours to meet tighter timeframes.
“The market has been relying on post-trade processes that require manual intervention for way too long […] The market is somewhat prepared, but the transition is going to be challenging. I expect more firms will need to streamline, automate and massively simplify post-trade workflows, as manually handling these tasks will be unmanageable in the long term, especially when you consider the risk implications in periods of elevated market volatility.”
James Pike, interim chief executive of Taskize, asserted that though the technological and operational side has been addressed on the whole, the increased number of exceptions set to be generated by the shift should be more seriously flagged as an area of focus for the industry.
“For example, the manual routing of exceptions remains far too prevalent and will not be scalable to handle a jump in trade failures. Non-US based market participants also need to implement the ability to ‘pass the book’ internally to other operations teams so issues don’t persist beyond the end of the trading day. These are two areas of the securities settlement picture that need to be looked at much closer with the time remaining to make sure settlement fails costs don’t increase further.”
Speaking on the FX side of things, Vikas Srivastava, chief revenue officer at Integral, confirmed that there is still a lot of work to be done when it comes to ensuring tighter integration between equity and FX trading systems.
“This work will need to continue even though the deadline has passed. Ultimately, executing FX trades against unconfirmed or unmatched equity trades will result in higher levels of settlement failures and, again, tighter integration of trading systems is the only tangible solution. This allows the process of the back-office confirming the US cash equities trade and then the information flowing to the FX trading systems to happen seamlessly with very low chance of errors.
“While the burden largely falls on asset managers, there is an opportunity for banks to play a greater supporting role for their asset management clients in navigating these challenges, by connecting their FX price discovery and execution services via APIs to the asset managers’ FX OEMS systems.”
Elsewhere, Alex Strekel, director of investment management solutions at Clearwater Analytics, explained that a key area where he has seen clients focus is on the connectivity between order management solutions, reconciliation and portfolio accounting solutions.
“A key area of improvement we’ve seen universally is in settlement processes, less so with the actual settlement, but more so in getting a clear picture of potential fails as near to real-time as possible, refocusing emphasis on confirm and affirm processes. Many [clients] have responded with perceived efficiency via adoption of single vendor models, where the vendor’s focus heavily on their own existing product suite vis a vis a best-of-breed approach.
“A prescriptive approach focused on both the benefits the business can derive from adherence has proved favourable – if potentially initially unintended. The result for many has been streamlined processes beyond simply settlement, creating a more nimble model with knock-on effects to accounting, client reporting, and overall data management processes.”