One of the themes that we are finding very exciting in the market at present is settlement acceleration.
With the upcoming US transition to a T+1 accelerated settlement cycle in May 2024, the move is also being considered by other jurisdictions including the UK. While a T+1 settlement will undoubtedly strengthen the resiliency of financial markets, it also – if implemented correctly– has the potential to enable real benefits to market participants by reducing risk and creating cost savings for firms and their investors via;
- Significant direct benefits relating to settlement risk, market and capital efficiency: Settlement risk between counterparties and less in-flux inventory for firms to manage. In addition to reducing settlement risk, there is a potential to increase market and capital efficiency due to the exposure over the settlement period being reduced
- Additional benefits of operational infrastructure modernization: T+1 provides a clear structure and rationale to modernize operational infrastructure and improve processes and market practices. While such investment can be difficult to justify on a standalone basis and process changes require market change to capture benefit – an industry trajectory to T+1 (and perhaps beyond) gives a basis and framework for these investments to be made and value achieved
Moving to a T+1 settlement is a significant lift from the T+2 transition and impacts the full trade lifecycle, the transition period will largely be strenuous for many market participants to ensure they meet requirements. And while it superficially sounds like the process needs to take half the time, market participants estimate the true reduction as more like 80% for trade processing, with many processes needing to take place ON trade date. It is also important to note that current state settlement involves a series of largely manual processes which are prone to risk, high costs, and operational stress given the resources and systems required to execute them effectively. It is vital that firms take a proactive stance as opposed to reactive to mitigate potential risks arising from their transition to T+1.
The delivery programme will be complex affecting both buy and sell side market participants– and require material change in certain business areas such as Prime Brokerage and Stock Lending. Activities heavily impacted will include the following:
- Trade processing (e.g. allocation, affirmation) and batch processing
- Reconciliations and exceptions management for e.g. resolving position and trade breaks within a compressed timeline
- FX and time zones e.g. funding processes
- Client dependencies and SLAs for e.g. allocation and confirmation timelines
- Vendor dependencies and SLAs for e.g. externally provided settlement processes
We are at the forefront of this industry change both in the US and the UK working with industry bodies including DTCC, SIFMA, AFME and ICI to create a published T+1 playbook. In addition, we are working directly with clients to prepare for the US Transition. We are also supporting similar changes in other jurisdictions, with the UK Treasury having established a taskforce to consider a T+1 settlement at its market and AFME working on the broader topic of settlement modernisation across Europe – in addition to supporting clients on their specific responses.
We are fully mobilised to work with our clients (across sell side and buy side) to help navigate these challenges successfully and capture the benefits available – and with a May 28th 2024 transition date now confirmed in the US, clocks are ticking for other jurisdictions.
This will be the first of a series of blogs on this subject, in which we will touch on both the value that can be enabled and the challenges to be navigated. Please stay tuned to hear more – and do reach out if you are interested in a more tailored discussion…