Firms operating in the capital markets space are used to adapting to regulatory change and constant market disruption. True though this may be, every so often, the ground beneath their feet cracks and groans in ways that even they are shaken from any creeping complacency.

So it is with the impending T+1 settlement cycle. Scheduled to come into effect in H1 2024, all US and Canadian securities trades must settle one day after trading in a move already sending shockwaves across the global financial landscape.

With T+1 ushering in a fundamental change to how financial institutions and investors conduct their business, participating firms must start organising now.

Preparations for this mammoth adjustment require that all market participants can demonstrate their readiness for T+1 by Q3 2023. Missing this critical deadline risks reputational damage, and loss of business to other firms who are ready for T+1.

Here, we look at how firms can proactively ready themselves for the next transformational leap in processing and settlement cycles.

But first, let’s look at what T+1 means for the industry.

T+1 brings benefits and challenges in equal measure

A primary advantage of T+1 will be the increased accuracy of settlements. Today, it is widely accepted that between 5% and 10% of all trades fail. As a halving of the timespan between trade execution and settlement necessitates automation, the likelihood of errors caused by manual intervention is eliminated.

An expedited settlement time also allows investors to receive their funds more quickly. With the floodgates opened to increased liquidity and arbitrage opportunities, new cohorts of investors will be drawn in by this optimised, automated process.

However, change on this scale requires the strategy to match. Processing times can only be halved with market participants making wholesale modifications to infrastructure, technology, and established behaviours.

Inevitably, such far-reaching transformation puts pressure on resources and ramps up compliance costs. Moreover, the risk of positions failing to settle in time - or at all - could result in losses, reputational damage, and the failure to secure highly sought-after client orders the next time around.

Tackling the core pain points with automation

Account opening

A move to T+1 represents a slashing of the time available to correct any issues during the client onboarding and account opening processes.

Firms must finalise processes before first orders are executed to mitigate the heightened risk of error. However, where segments of account data are absent, a successful settlement process could still be impeded.

Ultimately, deficient settlement processes will lead to increased risk exposure and strain on client relationships. In the short term, those this applies to will see their reputations impaired, and their peers outperform them. In the long term, the threat of penalties will cast an ever greater shadow.

Starting now, firms should evaluate all existing client onboarding and account opening processes ahead of T+1, particularly around non-formatted requests and those tasks that still require human input.

By deploying automation, thereby shedding the burden of manual intervention and the reams of physical documentation, the inventory needed to trade is instantly available, and value is realised more readily.

Transaction flow

The move from the T+3 settlement cycle to T+2 generated a raft of benefits partly owed to a sector-wide embracement of increased operational efficiencies, better coordination between market participants (including legal and compliance groups), and advancements in technology and communications.

Replicating that same commitment will not be enough to ensure a successful transition from T+2 to T+1, nor will the legacy approach of simply increasing headcount to improve efficiency.

Allocations, affirmations, and confirmations will need a universal shift to exception-based handling to remove human intervention from each process altogether. For many firms, particular focus will need to be directed toward the allocation process as so many are currently received in sub-optimal formats such as email, Excel, or Dropbox files.

Under T+2, the current affirmation deadline of 11:30 ET allows time for these formats to be manually converted, but the deadline under T+1 is likely to be around 21:00 ET on T+0, risking a rise in trade break numbers if allocations are not completed promptly.

Only intelligent data automation can improve efficiency and accelerate allocation processing rates here. Elsewhere, affirmations that were once delayed through a lack of crucial settlement information and confirmations hobbled by incomplete data become problems of the past.

Reconciliations

T+1 also creates new reconciliation challenges, not least the transition from a next-day to an intra-day process. With volumes expected to increase, robustness and scalability will be called into question. Firms lacking the requisite technologies face an undesirable future of reconciling trades late into the night to meet intra-day processing deadlines.

With the amount of processed data increasing exponentially, potential security concerns could arise, and firms will need to be confident in the integrity of their processes to avoid regulatory scrutiny.

To reduce the complexities associated with T+1, firms must again look to automation to remove those manual processes so susceptible to human error. Thus, ensuring the data that supports reconciliations in the new timescale is available and reliably sourced will become a crucial requirement. 

T+1 as an opportunity for growth

Implementing T+1 might seem a daunting challenge for firms as it will require an overhaul of existing systems and processes. Remember, when capital markets transitioned from T+3 to T+2, time was shaved by a third. Now it’s being halved.

Many of the more sophisticated firms will be in the fortunate position that 80% of the T+1 transition may already be within grasp. Nonetheless, to operate in compressed cycles while managing expected volume increases, questions of scale and robustness remain - even if initial frameworks are in place.

For these firms, the remaining 20% of the T+1 challenge is likely to prove the biggest hurdle. They will be challenged to automate areas where established T+2 environments are firmly entrenched and wrapped in legacy, sub-optimal processes, and outdated working practices. 

Whatever stage a firm is at in its preparations and regardless of its size, partnering with expert third-party data automation providers promises to make the transition to T+1 a more manageable prospect.

Instead of frantically applying sticking plasters to gaping chasms, the right technology, correctly implemented, will eradicate manual interventions and their associated human error. Accordingly, risk is lowered, customer service is enhanced, and scalability is facilitated.

Yes, there will be some initial, unavoidable difficulties as T+1 takes shape and processes come under scrutiny. However, T+1 is an opportunity to review all generic processes, irrespective of the markets a firm serves. As such, it should be approached with enthusiasm and viewed as a foundational platform for long-term growth.