The US move to T+1 settlement is going to impact firms in all regions and those investing internationally must comprehend the new rules, how they will affect counterparties and the actions they need to take.
This is according to Val Wotton, Managing Director, General Manager of Institutional Trade Processing, DTCC, who said that it is also critical to recognize that T+1 will touch every aspect of the trade lifecycle. “Therefore, each activity should be clearly defined, understood, and agreed upon by all parties to a trade,” he said.
For non-US investment managers, becoming familiar with trade affirmation – a US post trade processing requirement whereby the custodian, investment manager or prime broker agree to the details of the broker’s confirmation – is important. Automated trade affirmation is supported by DTCC Institutional Trade Processing’s (ITP) TradeSuite ID® service, which processes approximately 400 million broker confirmations annually. “It is recommended that investment managers affirm the broker’s confirm, but that responsibility can be delegated to an agent (custodian or prime broker),” he said.
According to Wotton, increased operational efficiency and end-to-end automation are pre-requisites to achieving a T+1 settlement cycle. Specifically, he said, critical activities that follow upon a trade match between an investment manager and the broker – allocation, confirmation, and affirmation – should be automated. Aside from meeting the tight settlement deadline, a zero-touch workflow where trade affirmations are automatically triggered to enable settlement will help to reduce trade fails and cope with sudden increases in trade volumes during periods of market volatility.
To meet the tight settlement window, the industry is recommending that trade allocations be completed by 7pm Eastern Time, and trade confirmation and affirmation be conducted by the parties to the trade and completed by the DTC cutoff time of 9pm Eastern Time on trade date.
Wotton said that beyond the obvious benefits of meeting DTC’s cutoff time, there is the additional consideration that if transactions are not affirmed via ITP’s TradeSuite ID service by 9pm ET on trade date, the deliverer will need to issue a night delivery order (NDO) by 11:30pm ET on trade date, or a day delivery order (DDO) on T+1, to DTC to ensure T+1 settlement. “NDOs and DDOs incur additional charges per transaction which are much higher than any fees for using TradeSuite ID affirmation,” he added.
Each firm should also fully understand what their individual custodian’s cutoff times are so they can manage to those parameters especially if they are working across time zones (like EMEA and APAC).
“By, modernizing, enhancing, or replacing existing technology to achieve higher levels of straight through processing, firms can help to ensure a smooth transition to T+1 within a short amount of time,” he stressed.
DTCC’s ITP services support straight through processing for its clients around the globe. ITP’s central matching service, CTM®, has a workflow called Match to Instruct (M2i) which streamlines what is currently a multi-step process of allocation matching in the middle office and then confirmation affirmation in the back office.
“We consolidate that down into a single process where the matching in CTM between the investment manager’s allocation and the broker’s confirmation is the affirmation of the trade,” he added. When that trade is affirmed, it flows down from CTM to the DTC through TradeSuite ID and is staged or prepared for authorization and settlement, a very efficient workflow,” Wotton said. “Additionally, ITP is working to take the concept of CTM’s M2i workflow and the direct connection to DTC and NSCC in the US and apply it across the globe by partnering with other CCPs and CSDs.”
The benefits of automation are not limited to matching and confirmation – it also applies to Standing Settlement Instructions (SSIs), which guarantee that trade settlements, margin and payments are sent for the correct accounts.
However, because SSIs are living breathing data points that change from time to time, firms using manual processes to manage their SSIs are not always using the most up to date data. In fact, inaccurate or incomplete SSIs are one of the primary reasons for settlement fails. ITP’s ALERT® service is an online global SSI database, with over 15 million SSIs stored to date, that automates the communication and maintenance of SSIs – helping clients ensure their data is the most accurate.
To prepare for a shorter settlement cycle, firms should consider solutions that provide them with insights into their operational performance. These solutions are already available and can provide a wealth of metrics on same day agreement, same day entry, submission time confirmation and affirmation rates against custodian cutoff times.
For example, subscribers of DTCC ITP’s CTM and/or TradeSuite ID services can now access a T+1 Scorecard, a dynamic dashboard engineered to help analyze the level of preparedness for the implementation of T+1 in US and eventually other financial markets.
The dashboard highlights relevant metrics such as what time allocations and confirmations are submitted and what time confirms are affirmed. “The T+1 Scorecard metrics, industry benchmarks, and trend analysis can be a crucial part of a firm’s preparations for a T+1 settlement cycle, as well as assist with identifying areas of operational inefficiency in post-trade processes.”
The transition to a T+1 settlement cycle in the US will have far reaching implications for firms globally requiring a need for a comprehensive understanding of all steps in the post-trade lifecycle. Automation, especially in critical activities like allocation, confirmation and affirmation is essential for achieving T+1 and minimizing settlement fails. Firms are urged to embrace automated solutions and tools to enhance their operational efficiency and prepare for the upcoming accelerated settlement timeframe.
