By James Maxfield, Chief Product Officer, Duco
On the 27th of May, Canada, Mexico and Argentina cut settlement cycles from T+2, to T+1. The US followed the next day.
It was a change years in the making. Cautiously, the industry watched as one day, then two, then a week went by without major issues. There were scattered problems regarding affirmations and fail rates but, collectively, the transition has been a success.
The T+1 cycle applies to stocks, corporate and municipal bonds, ETFs, certain mutual funds, and other exchange-traded securities.
The final verdict on T+1 won’t be available until the next 6-12 months. While it may look like a success so far, there are larger tests ahead for firms to contend with. The current systems in place are built on a house of cards, with creaking old technology, spreadsheets, and likely a few data errors from individuals rushing their implementation of T+1. Furthermore, it is unlikely that the majority of businesses will have transitioned using the best practice, which is an intra-day, data-centric operating model, in order to meet the T+1 challenges.
With this in mind and the reduced settlement time, the existing operational challenges will only be heightened and lead to many more.
While transitioning to T+1 may mitigate risks in the trade settlement process, it has also introduced additional complexity and potentially increased costs elsewhere. The misalignment of settlement cycles between actual trade settlement and the FX trades supporting out of currency settlement is one issue. One less day in the processing window means one less day of recoverability for systems if they encounter a problem. A significant amount of middle and back office technology is still legacy systems; batch driven and reliant on a few people who know how it works.
Firms that have addressed this challenge with traditional automation solutions will be feeling the pressure caused by having to clean up after bad data in a seriously compressed timeframe. Automating processes with inaccurate data will still result in exceptions that will now require immediate resolution on T+0 to meet new timelines. Firms need to employ a data-centric approach if they are to avoid difficulties in meeting deadlines and fulfilling data requirements. They need to understand how data impacts the trade lifecycle process and focussing on resolving the exceptions poor data creates.
All eyes on the UK and Europe
Now that North America has made the move to T+1, the focus will pivot to the UK. The head of the US Securities and Exchange Commission, Gary Gensler, informed the UK to set a firm deadline on when it will transition to a new share-trading settlement regime. The UK is expected to release its T+1 plan by the end of the year. Some argue that the UK should closely align with the rest of Europe while others believe the UK should move at speed, following the United States (and making use of its greater regulatory flexibility after Brexit).
We could see further fragmentation of the settlement process if the UK joins the US on a T+1 cycle whilst the rest of Europe is on T+2. This will only increase complexity of cross-border security activity. This could cause complications for teams working across different markets that are running on different settlement cycles. Additionally, firms must ensure each settlement is completed and aligned with all the relevant records. This is hard enough to do now but will become increasingly more difficult when markets become fragmented.
Those that grasp both the challenge and opportunity presented by T+1 will navigate the transition more easily, enjoy advantages and secure a means to gain a competitive edge. While the first reports have been positive, we’re still months away from the level of detail in the data to show a true reflection of T+1 in practice. British and European eyes are firmly fixed on America, looking for any second order effects that may not yet have emerged following the go-live yet. These could include the impact on securities lending liquidity, market reaction to volatility and triple witching expiries and rebalances. These will all be watched with interest over the next six months.
