By Katia Falina, Head of Buy-Side Post Trade Product, Bloomberg
The deadline for T+1 regulation in May 2024 for US markets has caused a flurry of activity in the media and amongst regulators, but signs indicate inactivity at the firms who will need to comply with the regulations is still widespread.
Statistical data drawn by the Bloomberg AIM Post Trade product team suggests that perhaps only a minority of firms have fully integrated straight-through processing (STP) and automation required for T+1 compliance.
TC Recommender, Bloomberg’s keystroke technology that helps firms understand how much of their settlement process can and should be automated, is one of several simple fixes that firms, which need to comply with T+1, should onboard and explore. The program analyzes the keystroke patterns of manual settlement processes, which come with significant time cost, and allows them to understand where to make efficiencies and which portions or entire settlement processes can be automated.
It is worth noting, as with most cases of technological and regulatory adoption, that some level of inertia amongst the business community is natural, or indeed a historical certainty. In most cases, the perceived magnitude of the challenge is often the largest contributing factor to inertia. It is possible that the majority of firms that need to comply with T+1 are waiting to see if anything will change before embarking on a workstream overhaul.
There are two big steps to T+1 compliance that are actually quite simple in most cases – even for firms that are not global corporations with sizable technology and compliance departments – and will solve the majority of problems. The previously mentioned TC Recommender is an answer to the first step of automation, and in most cases, leads to around 90% efficiency, which is a large part of the manual settlement process.
Dynamic Standard Settlement Instruction (SSI) storage is also an important initiative to explore for many. We know that one of the top three causes of failed settlement in the industry is a settlement instructions mismatch. One of the reasons for this is that, at present, most who are not prepared for T+1 are still storing separate copies of SSIs. This leads to significant duplication and potential error, which is extremely time-costly when it comes to processing and output. For this reason, SSI processing and storage may fly under the radar but pose a major ongoing risk if not dealt with properly.
One option for asset managers is to consume SSIs from the confirmation matching messages that they receive upon making a match, then retrieving those SSI’s for outgoing messages. This way, there is no danger storing separate copies of SSIs to your counterparty. Dynamic SSIs allow firms to see if the counterparty settlement instructions are different from the ones stored on their side and adjust in real time ahead of the trade going down to settlement.
Time is getting short, however, and those firms seeking to comply with T+1 should act quickly. It is possible a number of European asset managers will be looking to the US for answers, where T+1 compliance is leading the way with a May 2024 deadline.
Likewise, T0 is a conversation many in the industry are watching, but focusing here in lieu of T+1 is a mistake. At present, the two are different processes that require different technologies, and those exploring T0 are doing so as the ‘test’ phase. It is highly unlikely that T0 solutions will solve T+1 problems in time for the US deadline.
What we can expect – as with most regulatory deadlines – is a stampede for the finish line with approximately one-to-two months to go. The best advice is to get ahead of the crowd and ensure partnerships are in place and action plans are ready to go ahead of time.
The T+1 compliance landscape is not short of distractions, but for now, firms have time on their side and simple solutions at hand. A focused approach that allows realistic timeframes to engage good industry partners is the sensible strategy for low-risk compliance solutions.
