The Operational Twists and Turns in the Race to T+1
By Rob McGowan, Senior Sales Executive, Gresham Technologies
September 3rd marks a significant signpost on a long road that all market participants are going to have to travel. Financial institutions have just a little more than 700 days to prepare for one of the most significant market structure and technology compression changes in recent memory – the slashing of settlement timelines from T+2 to T+1.
The case for accelerating settlement in the US and Canada to T+1 makes a lot of sense. It promises to reduce market risk and margin requirements, which will have the hugely beneficial side effect of allowing clearing participants to utilize capital in more productive ways.
However, as recently outlined in Deloitte’s T+1 Securities Settlement Industry Implementation Playbook, commissioned by SIFMA and ICI, this change also brings a significant reduction in the time that financial institutions will have available to deal with exceptions or correct errors. Ultimately, this means firms will need to make significant changes to their systems, processes, staffing, and documentation.
This is a stark warning to those who did the bare minimum to get into shape for the 2017 cut in the settlement lifecycle, essentially kicking the can down the road, only to now find themselves fast approaching a number of bumps to overcome.
Take the area of securities lending as a prime case in point. Any time a constraint associated with lending stocks, where the lender will either need to get the original securities back from loan or substitute the lender with another counterparty, presents several complications for North American firms seeking to comply with next-day settlement. This is particularly pertinent in situations where the security has been sold late in the day to affect settlement the following day. The major risk is that due to the accelerated timeline, there will be a vast increase in potential settlement failures, which can stack up and significantly impact the bottom line.
But perhaps the biggest problem facing firms is the amount of uncertainty that could come from breaks and basic mistakes in workflows. To prepare for T+1, firms will need to inventory their clients to identify counterparties that currently send delayed, incomplete or erroneous data that can cause breaks or fails, or that can make frequent changes to their data feeds.
While this change is initially only being introduced for North American markets, due to the fact that US equity markets represent over 40% of the $108 trillion global equity market capitalization, according to SIFMA, market participants trading and lending US securities, say, from Tokyo to London, will also have a shorter period of time to get orders filled overnight. The same goes for financial institutions engaging in currency exchange transactions across many different jurisdictions and time zones. Firms outside the US trading FX market will need to identify counterparties that fail to send the correct information in a timely manner.
The strain on operational professionals is already being felt – this change is requiring them to standardize, normalize and eliminate manual processes, where possible, to cut the trade lifecycle in half. Given the existing T-minus-700-days timeline, it is becoming increasingly clear that transforming operational data into innovative analytics holds the key to unlocking an enhanced and redefined relationship between front and back-office operations.
It is no wonder that at the recent SIFMA Ops conference in Phoenix, more than 75% of attendees reported that the transition would have a significant impact on their firm, and over a third believing that in-house technology changes and the subsequent testing challenges would be their biggest hurdle in the race to get prepared. Although we have two years to prepare, the industry has to be operationally ready by September 2024. That means we have a long journey ahead of analysis, implementation measures and testing, all before the actual go-live date.
The real challenge facing firms right now is that they are rapidly running out of road on their journey to T+1 settlement. Firms that modernize their operations now and focus keenly on data quality and integrity will be the most successful in transitioning to T+1 settlement and clearing.