Transitioning to T+1 settlement

This change is expected to go live in the first half of 2024. Canada¹ is also planning a shift to T+1, while the UK² and Europe³ have started discussions around such a shift as well. This will set in motion a domino effect in securities trading as a whole. So, what is driving this change, and what are the benefits and challenges?

There are good reasons for this change to be proposed, with several benefits expected. In the words of US SEC chair Gary Gensler:

“These proposed amendments to the securities clearing and settling process, if adopted, could lower risk to the financial system and drive greater efficiencies in the markets. First, these amendments would shorten the standard settlement cycle. As the old saying goes, time is money. Shortening the settlement cycle should reduce the amount of margin that counterparties would need to post with clearinghouses. Second, these changes would require affirmations, confirmations, and allocations to take place as soon as technologically practicable on trade date (“T+0”). Finally, the release would require clearing agencies that provide central matching services to have policies and procedures to facilitate straight-through processing — i.e. fully automated transactions processing.⁴“

This initiative will have a significant impact on the industry, both in terms of IT system transformation and operational change management. Compared to the earlier transitions to T+3 and T+2, the move to T+1 will be far more challenging, as firms will have practically no time for existing manual processes and will need to rely on a high level of automation. Several processes that are currently carried out the day after trade execution – like allocation, confirmation, and affirmation – will need to be completed on the same day.

Given that this change is expected to come into effect in just a little over a year from now and involves a substantial degree of change around multiple aspects, from a process perspective, firms will need to re-examine their existing processes and redesign them according to the new timelines.  From a technology perspective, they will need to evaluate current IT systems to determine if they can support these changes and a move away from batch processing to extensive straight-through processing; examine compatibility with APIs to enable data access and sharing in real time to resolve exceptions; evaluate new systems in cases where existing systems will not be able to support the mentioned changes; and consider how AI and machine learning can be introduced to better predict settlement failures efficiently. On the people aspect, they will need to consider the need for extended hour staffing to complete several processes on the trade day; train staff on the new processes in line with the new timelines; examine a possible overhaul of communication methods with counterparties; and so on. Hence, it is critical for firms to start their T+1 readiness assessment at the earliest time possible.

Once this assessment is completed, firms will also need to plan, structure, and implement the change. Next, they will need to extensively test it — internally and externally. So, the clock is ticking, and firms must now seek specialist help to ensure that the change is being looked at holistically and across all functions. For a change of this magnitude, any siloed approach could lead to incomplete preparedness by the deadline, which in turn could have severe business consequences.

This change also presents banks and capital markets firms with a wonderful opportunity to ensure that their post-trade processing capabilities are being modernized with the latest technologies and AI tools that can help with process automation – and optimization.

As firms prepare for their T+1 transition, it is imperative that they keep an eye on a potential transition to T+0 in the future. While a T+0 transition will be significantly more challenging and have several additional considerations, it is widely believed that this is the direction the industry will move in – a worthy tradeoff. As firms prepare for their T+1 conversion, it would be prudent to plan their transformation with T+0 in mind, laying a foundation that they can build on for future changes.

Sources

1. https://www.osc.ca/en/news-events/news/canadian-securities-regulators-outline-steps-support-transition-t1

2. https://www.gov.uk/government/publications/accelerated-settlement-taskforce

3. https://www.afme.eu/Publications/Reports/Details/detail/T1-Settlement-in-Europe–Potential-Benefits-and–Challenges

4. https://www.sec.gov/news/press-release/2022-21