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T+1 Accelerated Settlement:
View from the Buy-side

It’s official: the deadline for compliance with the Security and Exchange Commission’s T+1 rule change — which shortens the settlement cycle for most securities to the trade date plus one business day — is less than a year away. Are you ready?

Perhaps because the final deadline remained in flux for some time after the SEC initially announced the impending change, there’s been some lag in preparation on the buy-side. When the DTCC took the industry’s pulse back in March, a full 41 percent of the buy-side firms surveyed said they hadn’t yet begun to plan for the switch at all.

Now, with under a year to go until go-time, the industry must ramp up or redouble their efforts to get ready for T+1 in 2024.

T+1 Requirements:
What You Should Know Before the 2024 Deadline

The full text of the SEC’s rule change outlines a number of changes to processes, policies and procedures that will touch everything from operations to funding across the entire industry, but there are some foundational changes to be aware of as the deadline to comply draws closer:

  • As of May 28, 2024, the settlement cycle for most securities transactions will be compressed from two business days after the trade date (T+2) to one business day after.
  • Institutional traders, broker-dealers and registered investment advisors must improve the rate of same-day allocations, confirmations and settlements.
  • Central matching service providers (CMSPs) must meet requirements — mostly pertaining to process improvement, documentation and reporting — that will facilitate straight-through processing (STP).
  • In addition, commitment offerings priced after 4:30 PM EST must be finalized on a T+2 settlement cycle, shortened from T+4.

While at first blush, many of these changes seem to impact sell-side parties primarily, buy-side parties should be aware of — and prepared for — the impact they will have on their own processes and systems.

Understanding the Industry Impact of an Accelerated Settlement Cycle

For North American markets, the move to T+1 may seem abbreviated, even abrupt. Globally, however, it’s hardly new. China already operates on an accelerated T+1 settlement cycle and India isn’t far behind.

In these markets, the benefits of a compressed cycle became clear in the unpredictable and sometimes turbulent economic conditions against the pandemic’s backdrop, and we at eClerx see that securities operators can apply the lessons of T+1 implementation overseas to understand and even mitigate its impact here at home. That includes its benefits, drawbacks and functional changes:

The Benefits of T+1

  • Operational efficiency:
    Many of the recommended functional changes impact settlement systems and processes and implementing them will result in improved overall operational efficiency.
  • Industry standardization:
    Similarly, the regulatory revisions in the rule change include documentation requirements that will standardize the securities transaction settlement process end-to-end.
  • Reduced risk:
    The primary benefit of T+1 is that it cuts in half the time in which trades are “up in the air.” The operational, systemic and counterparty risk is reduced significantly by reducing the volume of pending transactions.
  • Improved liquidity & capital requirements:
    With a reduction in risk comes a reduction in required cash and capital and safeguarding these resources during transactions.
  • Cost reduction:
    The compressed settlement cycle will force the optimization of traditional cost centers for market participants and catalyze subsequent long-term cost reduction.

T+1 Challenges to Anticipate

  • Late settlements:
    Shortening the settlement cycle is sure to cause growing pains and as market participants adapt to the changes, some percentage of transactions may not settle on time, especially at first.
  • Increased fails:
    As a result, market participants should anticipate — and be proactive about — an increased risk of fails as the industry adjusts.

The Buy-side Implications — 5 Steps to Take Now to Prepare

To understand the full impact of the move to T+1 for buy-side firms, it helps to reflect on the most recent implementation precedent. Believe it or not, T+2 went into effect just under a decade ago, and enough has changed in the interim that there are clear and novel considerations for market participants this time around.

The first —technological advancements like robotic process automation, cloud computing and data analytics tools — directly informs the second, the shift away from manual process completion in securities settlements. Even if the labor landscape didn’t prohibit it, increasing headcount indefinitely simply isn’t enough to achieve compliance or reap the long-term benefits this time around.

It certainly won’t allow for the modernization, standardization and optimization of the accelerated settlement process that widespread adoption would enable.

So where does that leave buy-side parties in the lead up to May 2024? With a list of increasingly urgent action items:

1. Conduct a thorough analysis of the impact of T+1 on your operation

The Securities Investment and Financial Markets Association (SIFMA) recently updated the T+1 Securities Industry Implementation Playbook to help guide market participants in the lead up to the 2024 deadline. It provides an excellent roadmap and outlines clear functional changes to deploy no matter where you are in the preparation process.

The only buy-side dimension that SIFMA anticipates no impact for is the venue of trade, making everything from business model to customer experience potential impact points for compliance achievement.

If you’ve yet to begin conducting your impact analysis, start now. Collaborate with stakeholders, participants and supporters to understand where risks lie, what those risks are and how to mitigate them in time.

2. Break down internal and external information and data siloes

To ensure a timely transition to T+1, buy-side parties will need to be radically transparent in trade status data reporting in real time. With so little time on the clock between initiation and settlement, it’s no longer feasible to wait for status updates to come from prime brokers as in T+2.

Buy-side firms must introduce or improve visibility into trade status data to correct breaks and mitigate fails to ensure timely settlements and avoid penalties.

3. Prioritize addressing potential break and fail points

With a complete impact analysis and increased transparency, buy-side parties will have a better understanding of where the weak links in their behavioral, operational and procedural processes are.

These may vary depending on a number of factors, but anticipating which areas are most vulnerable to trade breaks on the buy-side — standard settlement instructions or multiparty allocations and affirmations communication procedures, for instance — will inform which improvements and automations to prioritize first.

4. Move automation initiatives to the top of priority lists

RPA and other automations will no longer function as a means to a competitive end or a differentiating element once T+1 is in effect. The rule change introduces an industry-wide directive to improve and accelerate settlements and enable straight-through processing.

Buy-side participants will have to meet these directives to achieve compliance, of course. However, the additional implementation of automated processes that can be deployed to correct the discrepancies and errors that delay settlement the moment they’re detected can be the difference between a timely settlement and a penalized fail.

5. Leverage partnerships and tools that keep an eye toward T+0

Multiple T+1 implementation milestones have already come and gone, unfortunately, which can leave buy-side stakeholders in a kind of stasis thanks to the overwhelming process of catching up in time or starting completely from scratch.

What’s more, the eventual move to same-day transaction settlements is directly addressed in the SEC’s rule change, making it clear that further compression won’t happen “someday,” but “someday soon.” Rather than risk a sloppy implementation that kicks compliance achievement far enough down the road that T+0 will emerge on the horizon while corrections to T+1 trade cycle processes are still being made, buy-side firms should leverage tools and expertise while there is still time.

eClerx is a leading provider of settlement solutions for buy-side firms. We have a proven track record of helping firms achieve and maintain compliance and we offer a comprehensive suite of solutions to set buy-side parties up for success, from process improvement and automation tools to consultancy and staff augmentation.

If you need a trusted partner to help navigate the complexities and impact points of implementing the necessary changes before next year’s deadline, we can help. Get in touch today to begin leveraging our globally recognized financial markets expertise before the clock runs out.

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