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With only one year to go before the May 28, 2024 implementation date for T+1 in the U.S., market participants should already have preparations under way. T+1 aims to minimize counterparty and market risks, enhance liquidity, and improve overall market efficiency.
Pre-matching trades are a crucial enabler to T+1 settlement, since they help facilitate the timely and efficient settlement of securities transactions, according to Brian Schaeffer, President, Velocity Clearing.
“It reduces net exposure to clearing firms and you need faster more accurate ways to confirm trades when you are reducing the settlement cycle,” he said.
Brokers, custodian banks, and asset managers cannot afford to be disconnected from one another because they play essential roles in the trade settlement process. Schaeffer said that each party has specific responsibilities and dependencies that need to be coordinated for successful and timely settlement.
“If these entities are disconnected or operate independently, it can lead to a breakdown in communication, delays, errors, and increased risk,” he said.
According to James Pike, Head of Business Development, Taskize, if there is a problem between the broker and the buy-side organisation, the issue moves from the buy-side down to the custodian and then back up, resulting in a very bilateral process.
These processes can take time, sometimes days or even weeks, he stressed, adding that it’s therefore crucial to create a process that facilitates the flow of information between all three parties almost simultaneously.
“This currently doesn’t happen, so it will be a significant shift and a considerable change,” he stressed.
Pike added that enhancing connectivity and communication is a crucial aspect of the T+1 transition.
He said that much of the real work that needs to be done falls on the sell-side, which includes banks, brokers, and dealers. “Although the buy-side drives the process by initiating trades and their corresponding instructions, there is often a lack of connectivity between the buy-side, sell-side, and custodians,” he said.
Bringing counterparties together that are not necessarily in a direct chain of communication is not an easy problem to solve due to several reasons, according to Schaeffer.
- Fragmented systems and processes: Different market participants may use various systems, processes, and protocols for trade execution, confirmation, affirmation, and settlement. The lack of standardization and interoperability creates challenges when integrating these systems.
- Data accuracy and reconciliation: Counterparties often need to exchange and reconcile trade-related data, including trade details, transaction instructions, and settlement instructions. Ensuring data accuracy and consistency across multiple parties can be complex and time-consuming.
- Regulatory and compliance requirements: The trade settlement process involves compliance with various regulatory rules and requirements. Different jurisdictions may have different regulations, reporting obligations, and investor protection measures, which further complicate the process of bringing counterparties together.
- The largest players play multiple roles as they are banks and broker dealers. They sit atop all the boards of clearing houses (equity fixed income and derivatives) and control the game. They make a very difficult barrier to entry for other players to enter the clearing space which trickles down to other parts of the business.
He added that to address these challenges, the following actions can be taken:
- Standardization: Promoting the use of industry-wide standards, protocols, and formats for trade communication and settlement instructions can enhance interoperability and reduce complexity. Organizations like industry associations and regulatory bodies can play a role in driving standardization efforts.
- Technology integration: Utilizing advanced technologies such as distributed ledger technology (DLT), blockchain, and application programming interfaces (APIs) can help integrate disparate systems and facilitate seamless data exchange between counterparties.
- Data validation and reconciliation: Implementing robust mechanisms for data validation, reconciliation, and error handling can improve data accuracy and reduce discrepancies during the settlement process.
- Regulatory harmonization: Encouraging regulatory harmonization across jurisdictions can reduce regulatory fragmentation and streamline compliance requirements, making it easier for counterparties to operate globally.
- Collaboration and partnerships: Market participants, including brokers, custodian banks, and asset managers, should actively collaborate and form partnerships to develop common solutions and best practices for pre-matching trades and efficient trade settlement.
“By addressing these aspects, the industry can work towards bringing counterparties together effectively and enhancing the efficiency and reliability of the trade settlement process,” Schaeffer said.
