With the U.S. Securities and Exchange Commission (SEC) decision confirming a May 28, 2024, compliance date for the move to T+1, the one-year countdown is now on for firms to ensure readiness.
For hedge funds, the first step in their T+1 preparations should be to engage with their sell-side counterparties – both prime brokers and executing brokers. This is because registered brokers will be required to comply with the T+1 mandate and meet Same Day Affirmation (SDA) objectives which means they may need to modify their expectations around counterparty conduct and their operational processes, resulting in an update to broker policies. This could impact their hedge fund clients, requiring them to implement greater automation in the allocation and confirmation process to enable brokers to meet their T+1 requirements.
Today, buy-side market participants allocate block trades to underlying accounts and send those details to their executing broker and prime broker. On completion of the allocation process, each trade is confirmed by providing a detailed record of a transaction, including what was traded, the date of the trade, the cost, and the net value which is then affirmed by the investment manager, designated custodian or prime broker. To prepare for T+1, sell-side firms will need to successfully complete these activities on trade date, so that matched and agreed transactions can be submitted into the settlement process prior to the accelerated settlement timeframes. Without automating this process, T+1 is less likely to be achieved and the possibility of trade fails will increase.
As hedge fund firms consider their readiness, they should pay particular attention to middle- and back-office processes supporting the post-trade lifecycle, namely allocations, confirmations, and affirmations. Automation for these areas of the post-trade lifecycle have traditionally had less technology investment compared to the front office, where processing speeds can be in milliseconds. To achieve the post-trade efficiency which executing and prime brokers may require of hedge fund clients in order for them to comply with T+1, automation across middle - and back-office operations is critical. For most firms, switching from manual to automated processes for matching and confirmation is the most effective way to achieve this. The good news is that automated central matching solutions that can enrich trade details with standing settlement instructions and enable same day affirmation are available. It is recommended that market participants look into investing in and leveraging such a solution.
While for most hedge funds, preparation for T+1 will be compliance with the potentially updated policies and processes of their executing and prime brokers, hedge funds that are SEC Registered Investment Advisers (RIA), T+1 brings with it a record-keeping obligation. This requires an RIA to record the time and date stamp of transactions and to achieve confirmation/affirmation in line with T+1 expectations. For these entities, T+1 is a compliance issue and hence for them, post-trade automation is even more imperative if they are going to meet the new requirements.
With the May 28, 2024, T+1 implementation date now set, market participants must begin to prepare immediately. Hedge funds will benefit from understanding what they can do to prepare. For most, the first step will be checking in with their brokers on their post-trade capabilities and requirements and considering adding automated post-trade solutions that enable them to control their firm’s achievement of efficient post-trade pre- settlement processes. For RIAs, they need to ensure they can comply with the mandated T+1 requirements. In both cases, post-trade automation will be the most effective route to fulfilling their obligations. The time to automate is now.
This article was originally published in AlphaWeek on August 15, 2023.