It’s now been two weeks since T+1 went live in North America, following years of discussion, debate and deliberation. As the industry starts to settle into a new rhythm, what’s the landscape really looking like? And what will the rest of the year hold?
“The industry can’t sit back and think: ‘job done!’” Such is the warning of Tiago Veiga, CEO at Aurum Solutions. While many institutions have been keen to automate a lot of their manual processes, this enthusiasm will have to be kept up, he says. “Back-office staff will be under serious pressure to prevent things like bugs or glitches from disrupting the tighter settlement deadline.”
If firms haven’t yet started replacing their legacy systems to accelerate their post-trade activities, it will be particularly difficult to operate under T+1; “these types of activities are time-consuming and subject to human error”, Veiga affirms. These kinds of updates will also enable greater monitorability, adds ITRS CEO Guy Warren, with tech teams able to see the back office “through a single pane of glass”, allowing them to “detect and respond to issues faster, should they arise”.
Looking towards the second half of the year, “it will become clear for financial services firms over the next few months whether their technology is adequate for T+1,” Warren comments. Initial results are looking positive; a rise in affirmation rates and a reduction of fail rates has market participants feeling confident in the preparation work they’ve put into the transition
This success “speaks to the training and participation that went on ahead of time”, comments Rich Robinson, chair of industry trade organisation ISITC. The work done by DTCC is also credited by Warren as a key factor of the transition’s success; “[it has] been proactive in providing education and resources to ensure all participants understand the changes and adapt accordingly”.
That being said, “I would be surprised if there weren’t any bumps along the road” in the second half of the year, Warren says. “As with all changes, it will inevitably take the industry a bit of time to adapt to T+1, and it’s possible that we will see a spike in the number of operational glitches and additional costs for firms involved in the trading and settlement of securities.” The extensive risk assessments and stress-testing that companies were engaging with in the run-up to T+1 need to continue, he adds, along with in-house assessments to determine just how well firms are operating. Although the urgent go-live deadline has passed, there’s no time for the industry to sit back on its laurels.
Veiga also predicts “teething problems” over the next six months. “Operational resilience may not always be the most exciting subject matter that catches the headlines, but firms need to really renew their focus on planning for all scenarios so that if there are any hiccups, they can act quickly.”
Liquidity also needs to be considered, Warren notes; “Under T+2, firms had an extra buffer day to arrange financing for purchase obligations or shift funds between accounts to cover any shortfalls. The new one-day settlement system will require firms to manage liquidity more tightly, as there will be less time available to arrange this financing.”
Beyond the immediate impact of T+1 in North America, this process is being carefully watched worldwide as other jurisdictions adjust to fit into the new cycle. “The move is indirectly forcing other geographies to work in the US time zone,” Veiga explains, predicting that “it’s very possible that come December, fund managers based in Europe or Asia will find themselves having been relocated to the US.”
Timeframes on the buyside, particularly for European and APAC firms, was a significant concern going into the new settlement cycle, agreed Robinson. “There were challenges. Affirmations didn’t happen, Europe had issues with meeting deadlines that custodians had laid out.” Whether these problems are just initial jitters or a more long-term problem remains to be seen, and just how far-reaching their impact will be is not yet known. Robinson anticipates a “post-mortem” to take place at ISITC’s September conference, and is looking forward to a follow-up survey from The Value Exchange on the implementation.
Other regions who are considering also implementing shortened settlement cycles will be keeping a close eye on the North American transition too, noting what works and what doesn’t before they make any decisions on their part.
If any market participants were hoping that the T+1 discussion would die down after May 28th, their wish isn’t going to be granted. While the first major milestone has been met, there’s still a long road ahead.
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