T+1 accelerated settlement is coming – how far along is your impact assessment?

By now, the news is sinking in across the industry: the Securities and Exchange Commission (SEC) has confirmed that in just over one year, on May 28^th, 2024, the US settlement cycle will go from T+2 to T+1. Canada has re-affirmed that they will align their shortening of the settlement cycle to the US, while other markets (Mexico, UK) consider their next move. Many participants were ahead of the curve and have been able to pivot, moving timelines and test plans around to accommodate the new date. But, it has caught many in the industry off-guard.

The good news is that if you take immediate action, you are not too late to start planning your impact assessment.

The operational risk

The reduced settlement cycle brings a multitude of benefits, but the consensus among experts is that operational risk is the area which will suffer if not given the due attention. For some clients, this is an opportunity to address legacy issues which in the past have been without regulatory or industry catalysts for change. It is the perfect time to assess your current state and to capitalise on the chance to generate more efficiencies for your business.

The first step should be to complete an impact assessment. Don’t be tempted to treat this is an exercise to add headcount and ignore wider issues. This drive for post-trade efficiency is not a simple problem and will not be solved by simple solutions. What worked in past transitions probably won’t work this time.

Six elements of your T+1 impact assessment

Let’s look holistically at how a reduced settlement cycle affects the bigger picture.

1. Process – can your processes be scaled up? Do not accept manual touches and pain points as the norm. Assess whether you can drive process efficiency with existing technology and eliminate unnecessary steps. Consider automating your processes only after they have been simplified, with inefficiencies in both the process and system eradicated as much as possible. If the process warrants automation, make sure you have first assessed that it is as smooth as it can be. Automating faltering processes rarely works. It is critical to validate that your organisation’s core daily tasks will still be processed effectively in the T+1 landscape. Just because they work well now, don’t assume this will be the case in 2024.
2. Technology – can your existing technology handle increased batch frequency? Is the user experience the best it can be? Would hard-coded data require manual overrides and therefore extra steps in the process? There is a lot to consider. Make sure your tech is being used to the best of its capabilities. Your vendors should always be updating their platforms, creating additional modules and dashboards which might be the solution you need. Use technology in your favor. Understand the changes you need to make, both internally and externally, to tailor your technology to your needs. Speak to your vendors and review your in-house tech.
3. Risk & Controls – your controls might be robust in T+2, but will they still be in T+1? More frequent risk reporting and additional layers of checks could become less effective when under stress. Make sure you have assessed the increased pressure on processes, where mistakes might happen. Validate that your risk framework can handle this.
4. Ancillary Services – don’t assume that trade matching or settlements teams will be the only ones feeling the change.Consider the impact on the corporate action, cash, securities lending functions and more. A shortened settlement cycle affects everyone. Broaden your focus.
5. Operating Model – what is the impact on your people in a compressed timeframe? Increasing headcount or changing working patterns might be tempting but it is rarely the answer. Assess whether the current model will work for your people on May 28th 2024 and beyond. If scaling up looks difficult, then the impact of T+1 is more severe than you might think. Consult with your people and understand their current challenges.
6. Data – finally, use data to drive your assessment.If you don’t have the right MI in place, then forecasting the impact of T+1 on your organisation will be challenging. Understand your metrics, identify where the volume is now and predict where the pain points will increase. A truly effective impact assessment won’t just be complimented by accurate data, it will depend on it.

Regardless of whether you are buy-side, sell-side, or a custodian, if you participate in the US securities market then you need to be prepared for T+1. Start assessing that impact now to give your organisation the best possible opportunity to succeed.