This article first appeared as Beyond Liquidity on Markets Media. Beyond Liquidity is produced in collaboration with Liquidnet.
DTCC, the US financial market infrastructure, has deployed code into its test environment for shortening the settlement cycle, ahead of industry testing that is due to begin in August.
John Abel, executive director of clearance and settlement, product management at DTCC took part in a webinar hosted by SIFMA, which represents the US securities industry, and technology provider Broadridge on 22 June titled T+1 – Challenges & Opportunities of the Accelerated Settlement Cycle and Future Proofing for T+0.
The standard settlement cycle for most US broker-dealer transactions in securities will be reduced from two business days after a trade, T+2, to T+1 on 28 May 2024 in the US and on the previous day in Canada, The US Securities and Exchange Commission said the aim is to reduce latency, lower risk, and promote efficiency and greater liquidity.
Abel said DTCC has conducted a number of sessions on industry testing and produced a number of related documents.
“We have completed our T+1 build and successfully deployed our T+1 code into our test environment this week,” he added. “That roughly gives us a six-week period before we open up the system for industry testing on August 14.”
He continued that testing was scheduled to run for 20 two-week sessions, up to the implementation date of May 28 2024.
“I feel pretty confident in saying that we’re in pretty good shape for testing,” Abel added.
Mary Beth Law, North American capital markets at Broadridge, said on the webinar that the firm has also completed all of its code and set up a test environment. Broadridge has connected to DTTC is aiming to get clients ready for industry testing.
Justin Llewellyn-Jones, head of capital markets, North America at Broadridge, moderated the webinar. He said: “It’s ‘find a buddy’ time as testing requires industry participation and finding people that you can test and work with is very important.”
Callum Neito, head of investment bank operations Americas at UBS, said on the webinar that the bank will be ready for industry testing despite the complexity involved due to the number of different flows and capacities in which it operates.
“Our test managers are lining up those environments with our external vendors like Broadridge,” added Neito. “They are partnering with a couple of clients as well.”
Neito continued that more than half of the work the bank is doing is around improving internal efficiencies, which will also be a benefit under T+1.
Robert Doster, head of global markets operations at TD Securities, also said the Canadian bank had been doing a lot of internal work. It has formed 10 work streams across four areas – data; technology; business operations and behaviour between clients and sales and trading.
“As we start to think about initial testing, I think behaviour is a key area to focus on across all our firms,” Doster added. “Just how do we all fall in line together ? Testing outside of our control environment is going to be key.”
Jeanine Qasim, head of securities operations, CIB Securities Operations at Wells Fargo, said the US bank is well positioned for industry testing, and the first cycles will be key for the industry to be able to react to any issues in a timely fashion.
“It’s wonderful to have a large number of cycles, but we will need to be really agile about implementing any changes so that we can best take advantage of those cycles as they progress,” she added.
International impact
There has been much discussion of the impact of the shorter settlement cycle outside North America.
Doster highlighted that TD Securities, like other firms on the webinar, operates globally and so has to support transactions with counterparts in different jurisdictions, and also move risk and positions around legal entities and regions. He continued that it was positive that the T+1 deadline in Canada and the US are just one day apart, and also that Canada has already been working on increasing post-trade efficiency.
TD Securities is using the T+1 initiative to streamline its internal infrastructure and improve the operation of its follow the sun model. In addition, both fixed income and equity products are settled at DTCC but these products are often kept in separate siloes.
“There is a big push to bring some of those products together,” said Doster. “Our clients in Canada are different from our clients in the US and Europe, and this is an opportunity to harmonise settlement.”
Neito said the biggest issue that overseas firms will face is the lack of time to merge trades, and to handle allocations and affirmations.
“Some large clients are looking at changing their operating model with night shifts,” he added. “Smaller clients in APAC and EMEA are struggling at the moment and we haven’t really figured out all the answers yet.”
If settlements are late broker-dealers will incur more expensive fees and settling bilaterally via the DTCC is a drain on cash, inventories and operations resources and they may also not meet their compliance requirements. As a result, UBS is looking at delta one swaps as an option for certain hedge fund clients to remove operational complexity, and is also reviewing pre-allocation of trades.
Abel questioned whether a lot of the allocations have to take place at the close of trading in the US, as they could be made earlier in the day.
He said: “We don’t have to wait for a T+1 environment to have that conversation. We can have that conversation right now because it improves operational efficiency today.”
Law added that Broadridge is seeing higher affirmation rates since the T+1 deadline was announced. Clients are also monitoring the rate of settlement fails, and the underlying causes for trades not being affirmed or being allocated later in the day.
“We have seen an increase in same-day affirmations and a decrease in the number of late trades,” she added.
Transition to same-day settlement (T0)
There has also been much dialogue about whether the industry will move to same day settlement after the implementation of T+1, The panellists felt this was not a foregone conclusion as real-time gross settlement introduces challenges for areas such as securities lending, funding and foreign exchange.
Abel said: “We need to spend time quantifying the benefits of T0, and then see if it makes sense to move forward. If it does, I suspect we’re going to have a lot of work to do over the next couple of years.”
Law added that Broadridge was building out modern technology with T0 in mind.
“These tools include a global position manager in real time across asset classes and geographies,” she said. “We are starting to envision a new global trade management service that will bring together all trades to simplify middle office processing.”
The availability of real-time data is critical as settlement times become shorter so Broadridge wants to make access as easy for clients through dashboards or APIs, as well as providing alerts for exceptions and other types of notifications that are required to manage risk and operational efficiency.
“As we approach shortened settlement.we want to pivot towards eliminating some end-of-day or batch processes,” said Law. “We are looking to migrate critical processes into more scalable environments, such as AWS, so that we are able to increase timeliness and the availability of data.”
Neito highlighted that China already has had T0 for a number of years. He said: “The consequences of T0 to the broader industry will be quite profound and it could have unintended consequences in the overall ecosystem through ETFs, stock lending, repo FX, funding, and availability of collateral etc.”
