The SEC has confirmed that the long-anticipated move to T+1 will proceed and has announced an upbeat date for delivery.

Some quarters of the investment management industry have expressed concerns about the bullish timeline (full compliance by 28 May 2024), but there is no doubt that very soon there will be an industry-wide move from the current trading day plus two (T+2) settlement cycle to the shorter, one-day, T+1 time frame for US securities markets. This leaves only 15 months in which firms must fundamentally upgrade their settlement processes and technology stack if they have not already done so.

Some industry commentators suggest that a shorter settlement cycle should reduce the number of outstanding unsettled trades, reduce clearing agency margin requirements and allow investors quicker access to their securities and funds. Yet getting ready for such a seismic shift in operational processes is not to be underestimated. Failure to get effective processes in place will actually increase the number of failed trades.

The likely impacts on the middle office:
As announced by the SEC, the amended T+1 rules will: shorten the standard settlement cycle for most US securities transactions from two business days after trade date (T+2) to one (T+1); improve the processing of institutional trades through new requirements for broker-dealers and registered
investment advisers (RIAs) related to same-day affirmations; and facilitate straight through processing via new requirements applicable to clearing agencies that are central matching service providers (CMSPs).

When considering the impact of these changes on middle office operational practices, there are many areas that require consideration. Here we list five of the broader implications associated with T+1.

i) Timely trade execution management
Middle office teams often receive up to 80% of executed trades at the end of the day. There are trading conditions where it is essential to wait until the close of business in a market before passing on an executed trade record but that is not always the case. Initiatives and technology that enable firms to be more effective with intraday trade processing are essential to facilitate the move to T+1.

ii) Data management and attributes
Processes will be even more heavily dependent upon the accuracy of data attributes that support a transaction and the parties involved in the settlement functions. Standard Settlement Instructions (SSI) must be accurate and validated, leaving no room for error or misinterpretation.

iii) Communication standards
Today, there is a significant range of communication methods with custodians and settling parties and there is currently a lack of consistency. Timely T+1 settlement depends on a consistent messaging standard with data content that supports automation, streamlining trade processing immensely and accelerating the successful transition to T+1.

iv) Foreign exchange
There are few foreign exchange markets that settle on T+1. The foreign exchange market must be synchronised with T+1 settlement cycles in the longer term. For a fund manager, the management of cash positions will become heavily dependent on accurate settlement figures much earlier in the
trade lifecycle, and this requires effective and timely upstream and downstream data provisioning related to executed trades. Assessing cash positions the day after trading will not be an option.

v) Industry efficiencies
The T+1 trade lifecycle requires better processes to support the settlement of trades, with improved methodologies associated with managing stock that is on loan. Recall management must be timelier and should commence as soon as a position is sold. With European regulators also considering T+1, this issue requires significantly better controls.

As the settlement lifecycle continues to shorten, not only do institutions require the centralising of exceptions data on one dashboard but firms must question whether they can afford to not be running an exception-based protocol if they wish their business to be scalable.

How we can help
Salerio is a post-trade processing solution that enables asset managers, hedge fund managers and securities or fund services firms to automate the flow of securities and treasury trades from matching, affirmation, and confirmation through to trade instructions messaging and settlement. In a T+1 settlement cycle, the confirmation or affirmation process should really occur on trade date – mostly at the close of business in the region in order for the trade to definitely settle the following day. There’s very little time for the firm to identify a mistake.

This is one of the operational problems associated with T+1 that can be alleviated by our Salerio software. Salerio deals with confirmation, matching and settlement instructions management, helping the middle office deal with high volumes of trades that must be processed on trade date.

Salerio achieves this because users are only dealing with exceptions, thus enabling firms to process high volumes of transactions in the most time-efficient manner.

Getting ready:
The move to T+1 is undoubtedly a step forward for the industry, but key questions remain for middle office or operational teams:

• Will your operational practices easily adapt to the pressures of a T+1 deadline?
• Does your trade processing technology enable you to proactively avoid trades from failing?
• Is your platform scalable enough to adapt to the demands of same-day processing activities?
• Are you prepared for custodians changing their Service Level Agreements?
• Are you prepared for your operating day to be extended as custodians change their deadline for the receipt of instructions?

Salerio and its modular structure will enable you to meet ALL of these challenges.

“We were surprised at how quickly the exceptions came through once we had switched on the system during the Monday morning. From the beginning, the reaction to Salerio has been very positive.” Baillie Gifford

Click here to learn more about corfinancial’s post-trade settlement solution, Salerio.