The SEC and its Canadian equivalent, the Canadian Capital Markets Association (CCMA) recently adopted a rule amendment shortening the settlement cycle of securities transactions to trade date plus one (T+1) effective May 27th/28th, 2024. Currently, settlements within these markets for applicable securities occur on T+2.
The mandate affects most buy/sell side transactions, with a few exemptions, such as government bonds, commercial paper, and some limited partnership interests.
Driving much of this change results from the many globally impacting financial events over the course of the last two decades. The need for more stable liquidity and the increased requirements for brokers to provide more collateral to clearing agents while waiting for trades to settle has introduced higher liquidity, market and credit risks for all parties. By shortening the elapsed time between transactions and settlement dates, market volatility can be more effectively managed while reducing the risk of default by the trading parties.
What does it mean for asset managers??
Both the US and Canadian securities mandates are an effort to continue streamlining and enhancing the efficiency of institutional post-trade processes which has a meaningful impact across all asset managers.
Trade allocations for block trades, confirmations, and matching will now occur no later than the end of the trade date, which shortens the closing process for securities clearing and the time available to prepare for closing and address errors within the settlement lifecycle. This will require operational behavioral changes along with the leveraging of technology and automation to gain straight though processing efficiencies and lowering volumes of trade exceptions requiring repair.
T+1 is not merely a custodian issue. Wholesale changes are required on a global basis including asset managers and brokers to accommodate the shortened trading cycles for two of the world’s largest securities markets, with the expectation that many other markets will follow. Asset manager engagement across every aspect of trading US and Canadian securities or currency is critical. Additional impacts will be seen across many of the ancillary workflows as well, including important aspects of securities lending, foreign exchange, corporate actions, and collateral management. Failure to be prepared to support these changes will result in operational inefficiency, increases in trading costs through increased resource needs, and downstream interest claims, penalties, and buy-ins.
Fortunately, there is some precedent from the T+5 to T+3 to T+2 transitions of the past in terms of lessons learned, timelines and preparation, but the actual percentage of time shortening is now at a new level (think of settlement time being reduced in half). It’s not all negative, there are likely to be significant benefits in market liquidity, reduced risk (as seen from the European adoption of Central Securities Depositories Regulation (CSDR) in 2022) and efficiencies that will be gained over time but right now it’s all about day-one preparation and readiness. Within the current timeline to adoption, there is little time for error in execution of plans, placing pressure on advancing post-trade processes, thus presenting a readiness challenge seen across the globe.
The importance of automation within a trade date operating model
Considering these upcoming changes, asset managers need to holistically look at their end-to-end trade settlement model.
Focus should be applied to gaining efficiency in primary workflows such as:
- Automating trade interfaces between their order management/execution platforms and their settlement and matching applications.
- Creating the ability to match or affirm all activity on trade date, with minimal exception queues requiring repair and resolution with their brokers.
- Systemic trade instructions to both custodians and other interested parties aligned with expected tightening of custodian trade deadlines.
- Construction of data and oversight mechanisms to facilitate automated receipt of real-time settlement status updates from both custodians and brokers.
Pivotal to meeting readiness requirements for T+1, asset managers need to incorporate updating their technology to gain straight through processing (STP) and lowering volume of trades needing repair. Integrating the use of SWIFT (yes there are still asset managers today without SWIFT connectivity!), leveraging new trade date-based utilities via DTCC or custodians (like GC Direct for settlement instruction management), and settlement focused workflow management and oversight tools available today from Fintechs and service providers aimed at making those 98% to 99%-plus STP rates a reality.
Additionally, asset managers need to proactively look at ways for clearing settlement exception workflow earlier in the settlement lifecycle. Earlier (and automated) access to real-time settlement status provided by custodians and brokers via SWIFT or other direct means will enable resolving pending issues prior to crossing over to failure. The ability to access this data the morning of T+1 (or even potentially on trade date), will significantly benefit stakeholders in reducing the risk of failure.
While at this stage these goals may feel overwhelming, we don’t need to look far into the past to see how far we have come. If we remember back to the days of the conversion to Euro, year 2000, and T+5 down to T+2 and even CSDR, the upcoming T+1 adoption begins to feel more surmountable. Leverage tools your custodians, service providers and new technology can provide, and take advantage of lessons learned in prior execution of these large-scale initiatives.
Take advantage of this time to evaluate your options
In response to these upcoming market updates, asset managers will need to assess their current operating and technology environments and implement fundamental changes between counterparties, including moving away from manual processes like emails and faxes and transitioning to automated solutions to align with the modernization of the settlement lifecycle.
It’s important to start planning now to be in a favorable position to implement changes well before these rules take effect.
One possible solution is Ultimus’ flexible outsourced operational and technology driven trade settlement and middle office solution which can help firms prepare for these regulatory changes. With an advanced technology platform, access to the SWIFT messaging network with direct interfacing to key matching and settlement instruction management utilities, flexible service modules, and experienced service professionals, Ultimus is ready to assist firms in creating an optimized operating model to help prepare asset managers for these upcoming hurdles.
If you would like to discuss your current situation and the possible alternatives to solve for these new requirements, please contact us for assistance with your T+1 preparations today.