The countdown clock has started: in just one year from now, the industry is expected to be seamlessly and efficiently settling transactions in U.S. equities, corporate bonds, municipal bonds, unit investment trusts in one business day, in 24 hours or less. But before the industry gets to T+1, there are a great number of changes that must be made to support the move to a shortened settlement cycle.
DTCC has been working with SIFMA, ICI and the T+1 Industry Working Group to outline the steps needed for the T+1 shift and communicate those changes to the industry. The resounding message from all sides: the move to T+1 is approaching, and impacted firms need to plan, prepare, and test. Don’t delay, May 28, 2024, is now one year away.
Ana Lotharius, Director, ITP Product Management & Americas Industry Relations, and Robert Cavallo, DTCC Director, Clearance & Settlement Product Management, have been driving projects from across DTCC’s clearing and settlement businesses to prepare all systems, processes, and operations for T+1.
Significant challenges remain, and DTCC will continue to partner closely with the industry to promote a successful move to T+1 and safeguard the stability of the markets.
Read below for the top five things you need to do now to get ready for T+1:
The move to a T+1 settlement cycle will affect organizations across the financial services industry and throughout the trade lifecycle. Impacted market participants include issuers, asset managers, broker/dealers (retail, institutional, and prime brokerage), global custodians, vendors, service bureaus, transfer agents, exchanges, clearing firms, buy-side firms, and depositories.
Firms should already be considering the range of their impacted operations, across the entire lifecycle of the transaction, and understand both their own impacted processes as well as those of their counterparties. This means a collective inspection of all processes and identification of what may need to be done from a technology, behavioral, and operational standpoint. And this will be different depending on if firms are coming at this issue from the buy-side or the sell-side of the transaction.
“T+1 will have both upstream and downstream effects on the transaction lifecycle, from same-day account openings to the prime broker disaffirmation process, from retail and institutional transactions to corporate actions, many areas of clearing and settling will experience some type of change in order to accommodate the shortened cycle,” said Cavallo. “Firms need to develop project plans and testing plans, have their budgets in place to support this activity and be ready to remediate any identified gaps. In a T+1 environment, there is very little room for error and very little time for manual intervention.”
Accelerating the settlement cycle and further reducing the risks within the cycle can be addressed in two ways: through technology – and in some cases, new technologies – and by shortening the actual standard settlement cycle timeline, safely and appropriately.
Across the board, T+1 will require greater adoption of industry standards and solutions. These standards and solutions will help to increase operational efficiency by modifying systems, developing automation, and supporting straight-through processing.
“Firms that did not make technology changes in the move from T+3 to T+2 in 2017 are now confronted with the advent of even further advanced technologies,” said Cavallo. “Accelerating the settlement cycle is an opportunity to modernize and standardize infrastructure across the industry, and firms should update legacy technology systems to automate manual processes.”
To accelerate settlement, post-trade agreement and affirmation need to happen faster. This is achieved through increased automation in the allocation, confirmation, and affirmation processes. A reduced dependency on manual workflows can help firms not only achieve greater efficiency but also reduce costs.
The allocation of institutional trades is one of the critical post-trade processing steps, because once trades are allocated at the account level, the confirmation and affirmation process begins. Current processing, however, shows that only about 20% of allocations occur throughout the trading day, and the remaining 80% of allocations occur after the market closes on Trade Date. Encouraging trades to be allocated throughout the trading day increases the time that firms have available to process confirmations, and thus increases the likelihood of timely affirmations – and this can only be accomplished with increased automation. Whether a firm uses their custodian for affirmation or self-affirms, proper instructions are vital.
DTCC ITP services enable operational efficiency to meet T+1 by providing central matching workflows enabling SSI enrichment utilizing our ALERT service with golden-sourced data that trigger automatic trade affirmation and delivery of DTC-eligible securities directly to the DTC for settlement when a trade match between an investment manager and executing broker is achieved. DTCC’s CTM® Match to Instruct (M2i) workflow is a building block for both the buy and sell side, allowing automated affirmation and creating a more efficient model that removes duplicative steps in the process and reduces the risk of fails.
“CTM’s M2i workflow acts as a key enabler to achieving T+1 settlement,” said Lotharius. “In fact, most clients using the M2i workflow to match and affirm U.S. trades are approaching a 100% same day affirmation (SDA) rate by 9 PM on trade date.”
In a condensed timeframe of T+1, behavioral processes need to be updated. Fundamental changes need to happen between counterparties, including moving away from manual processes like emails and faxes.
“Securities settlement currently involves a series of manual processes that are prone to risk, high cost, and operational stress, and the industry cannot achieve T+1 if firms are still doing any of these steps manually,” said Lotharius. “Firms will need to move to automated solutions to align with the modernization of books and records. The industry needs to rely on automation and straight-though-processing to enable a smooth transition to T+1.”
In February, DTCC partnered with the Canadian Depository for Securities (CDS) with the support of the Association for Financial Markets in Europe (AFME), the Canadian Capital Markets Association (CCMA) and ISITC to sponsor a ValueExchange survey that explored industry readiness and emerging challenges tied to the new regulatory requirement across critical segments of the trade lifecycle. Some of the most concerning findings were that more than 40% of respondents had not yet begun planning for T+1, and 61% of buy-side firms felt unprepared for the transition, primarily across mid-tier and boutique organizations.
The best remedy is to be well-prepared, and the move to T+1 in the U.S. has sparked discussions around the globe. Both U.S. and non-U.S. institutional investors will need to adopt process and behavioral changes to meet new cut off times. With an established transition date, market participants can begin their focused preparation for T+1, regardless of geographical location.
Given the consolidated timeframes on trade date, there is very little leeway for delays and firms should take that into account as they go through their development and testing plans. DTCC has done this same exercise by completing a “T+1 Health Assessment” of services and systems that will be impacted by the transition to a T+1 settlement cycle.
“All firms need to truly understand the end-to-end impact of the move. By understanding the rules and what is expected and ensuring that robust test plans are in place for technology, software, and your vendors, firms can be ready to go for next May’s implementation date,” said Lotharius. “We are ready to work collaboratively with market participants to test, assess workflows, optimize global operating models, and drive greater automation.”
There are obviously still many unknowns ahead in the journey to T+1 in the U.S., but along the way there are preparedness milestones to hit, crucial areas of engagement, and systems to put in place. To support the industry preparations, DTCC has created a robust T+1 testing program that will kick-off on August 14, 2023, with the industry designed to support full end-to-end testing.
Firms should consider the various processes impacted by the T+1 functional changes and determine their scope of testing.
“There is a lot that happens outside of DTCC’s four walls that also needs comprehensive testing, including FX for firms with a global footprint, testing with counterparties, service bureaus and vendors and any internal operational workflows,” said Cavallo. “Firms also need to assess the resilience of their systems in all areas and perform adequate resiliency testing.”
The industry’s T+1 testing is scheduled to run from August 14th, 2023, to May 31st, 2024, using 21 bi-weekly testing cycles. DTCC’s T+1 Detailed Test Approach, as well as other supporting documentation on UST1.org, is provided to help firms prepare for testing. T+1 testing will not be mandated, but it is highly recommended.
“The number of changes and the magnitude of the firms making the changes means we need a comprehensive and well-coordinated test to confirm readiness and ensure a successful industry implementation,” said Cavallo. “There is no one-size-fits-all when it comes to testing. Members can test for T+1 settlement based on the changes made to their respective systems and processes. We are very excited to have the DTCC Integration Team playing a leading role in this effort and expect that they will help our clients achieve their goals as this journey moves forward.”
Get Ready
“We realize that many clients might not have the subject matter expertise or the resourcing to conduct a comprehensive impact analysis or execute on all the projects required to be ready by May 2024, and that’s where DTCC Consulting Services comes in,” said David Kirby, Securities Practice Head, DTCC Consulting Services. “Our experts bring deep industry experience and decades of post-trade knowledge to support firms along every step of their T+1 readiness journey from impact analysis to project design and execution all the way through post-implementation remediation."