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Firms have been diligently working on being ready for the transition to T+1 happening this spring (May 27 in Canada and May 28 in the U.S.). The deadline has been set by the Securities and Exchange Commission (SEC) and firms are doing the work they need to do in order to comply.
As part of ongoing efforts to decrease risk in the system, SIFMA, ICI, and DTCC started discussions in 2020 and formally initiated the effort to accelerate the settlement cycle to T+1 in early 2021.
“The industry has been working very hard to ready itself for this transition and we fully expect it will be ready by the transition date,” commented Tom Price, Managing Director and Head of SIFMA’s Operations & Technology Group.
“Although this is a complicated and complex initiative, we believe there are risk reduction and operational benefits for investors and the industry,” he said.
Nevertheless, according to Rich Robinson, Chair of ISITC, an industry trade group focused on developing standards and best practices in financial services operations, preparedness varies by type of firm, size and locale.
“We have seen different reasons for this, from lack of education to operating models that may not work with the compressed time frames,” he stressed.
Robinson said there are two different trade flows involved that may not have been clearly understood.
The broker-exchanged based activity received the most attention and is also more in a position to move to T+1 given the more automated information flows, and the fact that there are less parties involved in the trade flow, he said.
The buy-side flows, however, have been caught up in the T+1 mandate, and involve many more parties than may have been considered, Robinson said.
He explained that cost is an issue for some, adding that there are challenges in FX and funding, securities lending and recall processes, time zone issues – particularly for Asia-based firms, specific asset class complexities such as with commingled ETFs, and corporate actions processing.
“Cost, as a bucket issue, can be pointed to – but the things that drive those costs differ for firms,” Robinson pointed out.
Small and medium firms may not be able to afford staffing on off-hours, especially if they are in locations like Australia, Thailand and Japan, he said.
“Simply stating that automation is needed ignores the cost for some firms to make changes to their systems that would have enough impact to overcome the compressed timeframes,” he said.
Changes to operating models may not be possible, based on the type of business a firm operates – such as switching to prefunding models, he added.
He emphasized that larger, global firms likely will have less issues, as they already operate follow the sun staffing models, and have the resources to improve systems, and broad reach to adjust to funding needs.
Possible Operational Challenges
Many of the major concerns center on FX deals, which are normally done after an equity trade has been matched and executed. If FX trades cannot be completed within the same time frame, the market may experience additional settlement failures.
“Asset managers face a more condensed timeline for their security trading operations, in which FX is a critical step of the process,” said Brendan Burke, Managing Director on the Brown Brothers Harriman’s FX team.
To meet the upcoming move from T+2 to T+1, asset managers need to automate the trade matching process and have access to 24 hour FX trading to ensure security trades settle in a timely, efficient manner.
Burke said there will be some operational challenges around holidays and for global investors, who manage assets for overseas clients investing in US and Canadian securities.
The key is to match those trades with brokers as soon as possible, then calculate and execute the FX orders required to settle those cross border trades, he said.
“From a market standpoint, liquidity at the US close will be the one to watch,” he added.
Currently, liquidity tends to dry up when banks in the US wrap up their day and there is somewhat of an FX dead zone until banks in Asia are staffed, he said.
“I think we will see US banks extend staffing hours after the close, and liquidity providers in Asia potentially start their trading day earlier. Essentially, if there is demand for trading, the market will need to provide liquidity,” he added.
Operationally, it’s the compressed timeframes in light of the number of different participants that may be involved in any particular trade flow, added Robinson.
“If there are no errors, this is not an issue. But any kind of error needs to be resolved almost as soon as it occurs in a T+1 environment,” he said.
In a portfolio block trade, if there is one stock lending account that fails on a recall, that could cause issues around position availability or require cancel/rebooking manual intervention, for example.
New account setups may be delayed for due diligence, impacting ability to instruct, he said, adding that there can also be complications in the corporate actions process, such as for voluntary rights or actions that require position realignments.
“There is a potential for an increase in failed trades but using failed trades as a measure may hide other inefficiencies and costs,” Robinson said.
Firms may over-hire to ensure trades do not fail, he said: “That can be a concern as once they get their feet under them, and they find themselves overstaffed.”
Firms that exit the space also may not be identified, as their collective volume likely would go to larger players, and there could be consolidation, he added.
Also, according to Robinson, some services may become more expensive for end clients, or stop being offered due to the complexities of timing, such as some stock lending or FX services.
Ensuring timely transition
The most common paths in the run-up to T+1 is either increased automation and globalization of the trading desk via outsourcing FX, or adding resources in-house, mostly employees and technology, according to Burke.
“Regardless of which options global investors choose, a consistent, automated, global process is the key,” he said.
It is also critical for managers to have reliable partners & liquidity providers, who can support both the trading and operational complexities, he added.
Any bank can provide a price to a client, but the new accelerated trade lifecycle will reward providers who can consistently deliver high service quality, and assist clients with everything from FX trade calculation, order routing, execution and settlements across their network of custodian relationships, he said.
Industry experts agree that the key to ensuring a smooth transition is preparation and education.
Robinson said that organizations should thoroughly review all of the resources available from industry groups and leverage the recommendations to evaluate their readiness across operations, technology, staffing, and workflows.
For example, ISITC’s T+1 Task Force has published best practices, case studies, and an implementation playbook that provides a blueprint for the changes needed at various stages. Firms should actively participate in industry events and forums to understand common challenges and solutions, he said, adding that ongoing engagement creates alignment and gives leaders insight into the transition status across the industry.
Additionally, the operational impact assessments and benchmarking data available through ISITC’s collaboration with groups like The ValueExchange and DTCC deliver tangible insights into preparedness gaps at the firm and industry levels, he said.
“Armed with specific data points on vulnerable areas, companies can course-correct effectively,” Robinson stressed.
“The transition date is the date. We are hopeful for a smooth transition, but firms should plan for issues, as they would in any market change,” he added.
Hopefully all firms understand the extent to which they will be impacted, Robinson argued: “They should be working with their providers and clients to make sure their core processes are sound.”
“From various surveys, there are clearly firms that have indicated they will not be ready, even those that began preparations last year. Even CLS has indicated that some services may not be available until after the T+1 date in regard to FX services,” he said.
SIFMA’s Price added that “time is of the essence” and firms need to be very aware of what steps are left for them to complete ahead of the transition dates.
He noted that SIFMA’s T+1 Playbook is designed to assist firms in their transition to T+1 settlement. This guide outlines a detailed approach to identifying the impacts, implementation activities, implementation timelines, dependencies, and risk impacts, that market participants should consider in order to prepare for the impending transition to a shortened settlement cycle.
Price added that SIFMA is also offering a T+1 training video, A Journey to an Accelerated Settlement Cycle.
This video walks through what firms should be doing to prepare for the transition, breaks down the sections within the “T+1 Securities Settlement Industry, Implementation Playbook,” outlining a detailed approach to identifying the potential impacts, implementation activities, implementation timelines, dependencies, and risk impacts, that firms should consider, he said.
“Every firm has a different infrastructure, different businesses, clients, as well as operational process and geographies which all need to be taken into consideration,” he concluded.
