Banks in Europe are making their final preparations for T+1, but it’s tech teams who face the biggest challenges under the new one-day settlement system. Guy Warren, CEO at ITRS, discusses the key risks and the steps they can take to adapt.
The much-anticipated switch to T+1 in the US has arrived. The move to one-day settlement heralds a significant shift in the financial landscape, presenting both opportunities and challenges for banks. However, it is the often overlooked tech teams within these banks who are under the most pressure to make sure their IT operations can adapt to this transition.
For any bank, the implications of an IT outage are severe, ranging from revenue loss to reputational damage. These consequences will be even more profound under T+1. The narrower settlement timeline means that most of the post-trade activities (matching, allocation, affirmation, confirmation, submission) need to be completed by 9pm ET on the trade date. Therefore, if a bank suffers an outage, then this could dramatically affect their ability to settle the trade within 24 hours.
There’s also a greater risk of IT issues caused by human error. The combination of the tighter settlement deadline and the time zone difference means staff at European banks may be required to work longer shifts after closing hours. With the risk of innocent mistakes rising under stress and fatigue, the move to T+1 could lead to an uptick in IT problems caused by human error.
Tech teams are facing these risks against an increasingly strict regulatory landscape. In January 2025, the Digital Operational Resilience Act (DORA) comes into force. The act aims to strengthen the IT security of financial institutions, including banks, by introducing a range of new requirements for the reporting of major IT incidents, management of third-party IT risk and digital operational resilience testing.
As a result, failure to effectively mitigate or identify IT issues could result in banks facing fines and penalties under the new standards.
In light of these challenges, tech teams at banks will be under renewed pressure to ensure a smooth transition to a T+1 environment. Here are some of the steps they can take:
- Stress testing and risk assessment – Conducting comprehensive stress tests and risk assessments is essential for identifying vulnerabilities and potential areas of weakness in the existing infrastructure. Tech teams should analyse critical business functions, systems, and processes to anticipate how they will perform under the shorter settlement deadline. These assessments provide valuable insights into where enhancements or adjustments are needed to avoid IT hiccups down the line.
- Budget review – Tech teams must ensure that budget allocations align with the strategic priorities and requirements of the new one-day settlement system. This involves not only investing in tried and tested technology, but also allocating funds for ongoing maintenance. Banks should look to review this budget on an ongoing basis to minimise the risk of underinvestment or resource constraints once T+1 comes into force.
- Update legacy framework with new technology – Banks should use the stress-testing process to identify areas where legacy framework may be insufficient for meeting the demands of T+1 settlement. Introducing new technology such as monitoring and observability tools into their IT systems can not only help streamline their back-office operations, but also provide them with far more visibility over their IT estate. Monitoring tools enable tech teams at banks to view their back-office through a single pane of glass, meaning they can detect and respond to issues faster should they arise.
- Define clear roles and responsibilities – Establishing a clear responsibility model is essential for effective incident management and response. This includes identifying key stakeholders, assigning specific duties and establishing communication channels for rapid response and resolution. By clarifying roles and responsibilities, banks can create a far more streamlined decision-making process, enabling a more agile and cohesive response to IT challenges. As part of this, banks should practice scenarios that could occur and rehearse responses.
Modern systems need to be resilient enough to cope with the demands of T+1, meaning banks must cover all corners when it comes to preparing their back-office for this change. Doing so is not just a regulatory requirement, but also crucial for banks in an increasingly competitive landscape where business continuity and client retention is more important than ever.
T+1 will no doubt bring its fair share of headaches, but it also presents a golden opportunity for banks to review their current infrastructure and future proof their IT estates for years to come.
