The testing cycle for the upcoming move to T+1 settlement started this week, with firms now having nine months to check and implement their new post-trade processes before the US deadline on 28 May 2024. But where are the gaps, and what should the priorities be? We talk to industry experts to evaluate the key challenges.
Time flies
“The US markets started assessing the movement from T+2 to T+1 two years ago – but now the talking ends and the testing begins,” warned Jesus Benito, head of domestic custody & TR operations at SIX, speaking exclusively to BEST EXECUTION.
“Clearly, this transition is not the same as when we moved from T+3 to T+2, as now the time pressure is much greater. However, the upcoming test cycles will be a good indicator of how prepared the industry is ahead of next year. Either way, the industry has plenty of solutions available to get there – and this is the perfect time to begin stress testing.”
Data driven
For the sell-side, it’s a daunting task – with the sheer quantity of data one of the biggest challenges.
“Brokers rely on clients for critical data throughout the trade processing and settlement cycle. Under the new rules, brokers will need this data much earlier,” says Broadridge.
“The sell-side will be required to complete affirmations, confirmations, and allocations process on the day of trade. In addition to ambitious upgrades of key internal functions, hitting those deadlines will require timely inputs from clients. As a result, a core part of preparing sell-side firms for the switch to T+1 will be ensuring that buy-side partners are equipped to keep pace with the new, accelerated demands.”
FX focus
“While the full switchover is not until next May, this testing deadline brings T+1 operational preparations into sharp focus,” added Alex Knight, head of sales and EMEA for Baton Systems.
“Due to the need to have dollars available to settle trades of US securities, T+1 will undoubtedly be changing the way that many firms approach their FX execution and settlement.
“For starters, it will lead to a situation where an increased proportion of trades are going to need to be settled outside of CLS, which will result in heightened settlement risk if not appropriately addressed. When also considering the fact that there is going to be less time to remediate breaks in a condensed settlement window, firms have to integrate alternative and highly automated forms of PvP FX settlement into their post-trade processes to ensure effective and safe settlement after the T+1 deadline.”
Matching momentum
It’s this final cycle of testing that will sort the wheat from the chaff when it comes to preparation and implementation – and firms should be using this time to rigorously check their own processes and systems.
“These testing cycles will reveal any cracks in preparation work that need to be addressed ahead of May 2024,” agreed James Pike, head of business development at Taskize.
“Take one of the key early-stage components of T+1 prep – comparing settlement details to ensure that they meet the terms of the transaction. Changes to trade matching processes, including much tighter deadlines for the receipt of an asset managers trade instructions, not to mention the resolution of pre-trade problems, are of paramount importance.
“Pre-matching of trades is one of the biggest obstacles to achieving T+1 settlement. Without this, trades cannot move into the shortened settlement cycle and will likely miss the continuous net settlement process.”
Tick tock
Perhaps unsurprisingly, the biggest pressure for preparation is the need to get ready for a compressed timescale – with far less margin for error. And those who succeed could well gain a competitive edge against those who fail to prepare.
“In a T+1 environment, there will be no time to solve problems by throwing additional bodies at manual functions.” warned Broadridge. “If there was ever a catalyst for automation, T+1 is it.”
But be warned. “There is no playbook on how to assemble new processes and technologies into an infrastructure for next-day settlement. Every… firm has to chart its own course.”
©Markets Media Europe 2023
