Once upon a time, trades were settled on T+5, taking five days from trade date (T) for securities and funds to be exchanged between the buyer and seller. As shortened settlement cycles can help create greater market efficiencies and lower capital requirements, most countries have since progressed to settling trades on T+2 today.
Related: Is Asia Pacific Ready for T+1?
With the U.S. preparing to migrate to T+1 in 2024, what can Asia learn from its journey? At the recent ASIFMA-DTCC Joint Webinar, Nellie Dagdag, DTCC Managing Director, Marketing and Communications, APAC, spoke with John Abel, DTCC Executive Director, Clearance and Settlement, Product Management, to gather his experience on accelerating settlement cycles.
Below is a recap of their discussion:
Dagdag: With your vast experience in navigating the transition to shortened settlement cycles in the U.S., how do you compare the previous shifts with the upcoming move to T+1?
Abel: The drivers – reducing risk and creating operational efficiencies – that pushed the move from T+5 to T+3 then to T+2 remain the same in prompting the progression to T+1. The longer it takes to settle a trade, the greater the counterparty credit risk and, thus, the associated margin required to mitigate the risk especially during periods of high market volatility such as those we saw in the last two years with COVID and the meme stocks.
Building on the successful partnership that helped the industry migrate seamlessly to T+2 in 2017, DTCC, along with the Securities Industry and Financial Markets Association (SIFMA), and the Investment Company Institute (ICI), are again leading the transition to T+1 in the U.S. We established industry groups to identify the areas of change and to discuss the type of documentation needed, rules to be addressed and the implementation plan. Because of our past experiences, it has been relatively easier for the industry to get organized and begin the work of moving to T+1.
Dagdag: Could you give us a quick overview of T+1 in the U.S.?
Abel: At a high level, 2022 is a planning year for most firms, DTCC included. This is the time to get organized – form internal working groups to conduct in-depth analysis, identify gaps and changes needed, secure budget, etc. 2023 will likely be a build year with firms to develop, and internally test, any changes or enhancements required for their systems and processes. And then 2024 is for industry-wide testing and implantation where a signification amount of time will be dedicated to testing and ultimately implementation.
DTCC will be publishing more detailed test documents resulting from collaboration with industry representatives – we have established an industry working group to refine the types of test scenarios and test events. Currently, one of the unknown issues is the implementation date. When the U.S. Securities and Exchange Commission (SEC) released its proposed changes in February 2022, the proposed implementation date is the first quarter of 2024. Many in the industry think a September 2024 implementation date is more feasible – the industry is waiting for the final rule from the SEC which should include the SEC mandated implementation date.
Dagdag: What have you seen as major concerns for market participants?
Abel: It is ideal to operate in markets with harmonized settlement cycles. The fact that the U.S. is moving to T+1 while many other markets remain at T+2 is not ideal, however, this is not unprecedented. Europe moved to T+2 almost three years before the U.S. moved in 2017 and Japan, for example, moved almost a year later. The industry has experience dealing with these types of discrepancies.
Firms across all market segments should relook at the systems and processes put in place back in 2017 to ensure they are able to support the requirements for T+1. The other concern is around foreign exchange and the U.S. dollar funding. Firms should review their funding processes for government securities and equity options that are currently being traded on a T+1 environment and review other funding options to make sure they can meet the requirements of T+1 settlement.
Non-U.S. entities should begin discussions with their custodians and other partners to understand the impact and explore the options available for foreign exchange (FX) funding within a tighter processing window.
Dagdag: Can you explain the hurdles facing non-U.S. institutional investors given that the deadline for matching and allocation is at 9PM on T0?
Abel: The best guidance I can provide is to adopt industry standards and solutions in the market to expedite post-trade processing. This should also partly address the time zone differences challenge. For example, DTCC’s Institutional Trade Processing (ITP) solutions, such as CTM® and match-to-instruct (M2i), enable firms to create more efficient processes. With these solutions, trades centrally matched-affirmed-confirmed in ITP between buy-side firms and their broker/dealers are sent to the Depository Trust Company (DTC) for settlement without further manual intervention. This no-touch workflow processing has enabled very high affirmation rates of up to 98% on T0 in the current T+2 environment. Adopting M2i or a similar process is imperative to meet the tight T+1 processing deadlines.
Firms may need to review their operating models to handle matching and allocation processing intraday or move these processes to their other post-trade locations (follow-the-sun model). Firms in Asia can leverage DTCC’s Consulting Services to navigate and prepare for the changes ahead. DTCC can assist in diagnosis of current challenges, designing a new operating model, and delivering and end-to-end T+1 migration program.