In many markets around the world, T+1 is coming your way – or could be soon. As more markets look to shorten their securities settlement cycles, Simon A.X. Daniel, Product Manager at Swift, spoke to Virginie O’Shea, Founder of Firebrand Research, about what this means for the securities industry and how firms are getting ready.
In most markets, a standard trade settles two days after the date when it was executed, or T+2 for short. But some regulators, following recent periods of volatility, are reducing the expected settlement date to one day (T+1).
In February 2023, India became the first major economy to introduce T+1, having phased it in slowly since February 2022. The US and Canada will follow suit in May 2024, but unlike India, they will adopt T+1 for their markets in one swoop.
Other markets, including the EU and UK, are currently consulting with the industry on T+1 as well.
T+1 is no walk in the park
T+1 could help the securities industry better mitigate counterparty risk, generate capital and lead to operational efficiencies.
But while there are positives, getting ready for T+1 is not without its challenges. With the US now less than 12 months away from going live with T+1, I spoke to Firebrand’s Virginie O’Shea about where the potential issues and opportunities lie for financial institutions.
Most people imagine that removing a day from the settlement cycle will reduce post-trade processing times by 50%.
But, this is not the case.
Instead of the 12 hours firms have to process trades under T+2, the Association for Financial Markets in Europe (AFME) this will drop to just two hours in a T+1 environment.
“When you talk to people about some of the areas where issues may emerge with T+1, they highlight securities lending and borrowing, FX and liquidity and concerns about a possible crunch in the middle office,” said O’Shea.
So how will they be impacted exactly?
An investor trading US equities out of, let’s say Sydney, will have to execute their FX transactions on T/ T+1, instead of T+2, forcing them to pre-fund their FX trades.
Securities lending could come under strain too, as firms will have less time to recall on-loan securities. This might lead to more breaks and fails, resulting in an increase in penalties.
Shorter settlement cycles will also mean less time for firms to carry out trade affirmations and confirmations, together with their various asset servicing responsibilities, like corporate actions.
Exchange traded fund processing could face disruption too, especially if their underlying portfolios contain non-US securities that settle on T+2.
Additionally, there needs to be greater investment into automation and zero-touch processing. A lot of post-trade processes still require manual intervention. According to Firebrand Research, 81% of North American banks and brokers continue to use outdated internally built systems and manual tools during post-trade.
“Same day affirmation under T+1 will be more painful for firms who are still using manual processes,” said O’Shea. “This will require firms to move to full automation. Automation on one side is not enough, as it needs to be done by everyone involved in the settlement process.” Although investment into automation will incur some immediate costs, modernisation will pay off over the long-term.
Firms should also be fine-tuning their operating models ahead of T+1. While large institutions can rely on the ‘follow the sun’ model to assist global clients out of multiple locations, this isn’t practical for some smaller firms. Instead, these institutions are redeploying people to different time-zones. For example, a handful of US-based SMEs have sent support staff to the West Coast, so they can help clients in Asia with T+1 from a funding and liquidity perspective.
A focus on efficiency
Shorter settlement cycles also mean less time to correct any issues or manage exceptions that arise. With financial penalties in place for late settlement under the Central Securities Depository Regulation’s (CSDR’s) settlement discipline regime, increasing settlement efficiency is more important than ever.
That’s why adopting a Unique Transaction Identifier (UTI) across securities settlement transactions is another way the industry is preparing for T+1. The UTI is an ISO message standard and is used by services like Swift Securities View that enables firms to track transactions end to end throughout their lifecycle.
And with end-to-end tracking, firms can proactively detect and manage settlement discrepancies so that problems can be resolved before they occur and avoid costly settlement fails.
The shift to T+1 will throw up various complications, but they are manageable. Although existing technologies can support processes in a T+1 context, this will only work if there’s automation throughout the chain. T+1 could be the tipping point that forces firms to retire manual processes in favour of straight through processing (STP). After all, the race to T+1 is on, and you’re only as fast as your slowest link.