For many years, automation of the post-trade lifecycle – specifically the allocation, confirmation and affirmation processes - have been viewed as best practice but have not been universally implemented. However, recent market volatility resulting from events such as the Covid-19 pandemic has emphasized the need for greater post-trade efficiency. Now with the Securities & Exchange Commission (SEC) decision to accelerate the U.S. cash equities, corporate bonds and municipal bonds settlement cycle to T+1 in May 2024, post-trade automation has once again become critical focus area for industry participants.
Related: Using CTM's M2i Workflow for Automation for T+1 Readiness
Specifically, the SEC highlighted that institutional trades must be allocated, confirmed and affirmed as soon as is technologically possible and no later than trade-date, referred to as, Same Day Affirmation (SDA).
A T+1 settlement cycle, as well as SDA, is best achieved if processes upstream from settlement are automated, including post-trade processes. This includes investment managers allocating block trades to underlying client accounts and instructing those details to the executing broker. Thereafter, once the allocation process has been completed, the broker confirms each trade 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. By successfully completing these activities on trade date or SDA, matched and agreed transactions are submitted into the settlement process in time to meet the accelerated T+1 settlement timeframes.
The need for greater post-trade automation applies to firms of all sizes. However, it tends to be even more relevant to smaller buy-side and sell-side firms that are likely to be leveraging manual processes, which are not only time consuming but also more prone to human error. Further, for those firms conducting cross-border transactions with a requirement to settle U.S. equities, corporate bonds and municipal bonds but are not operating in the U.S. time zone, there is an even greater need to implement post-trade automation as T+1 will compress the settlement window available to them. Therefore, upstream processes need to be conducted more efficiently. The good news is automated central matching solutions that can enrich trade details with standing settlement instructions and enable same day affirmation are available today and utilized by a community of over 6000 clients across 52 markets around the world.
The importance of post-trade automation hasn’t always been front and centre in the minds of operations professionals, but it has grown significantly over recent years. The electronification of financial markets resulted in front office operational investment taking centre stage, but the shift in focus to post-trade has been a significant evolution. Post-trade investment was certainly increased post-financial crisis when it was agreed at the G20 Pittsburgh summit in 2009 that strengthening existing post-trade practices and implementing new, more efficient processes would help to strengthen the global financial system and mitigate risk. Now, with the move to T+1 only just over a year away, the need for post trade automation is greater than ever before.
DTCC has been operating in the post-trade landscape for the last 50 years during which it has evolved dramatically. With the U.S. move to T+1 settlement on May 28, 2024, combined with technology and other industry advancements, we anticipate the rate of post-trade automation will accelerate. As a result, market participants can expect greater operational efficiency, and lower operational risk in their middle and back-office functions. With benefits such as these, it can be expected that post-trade will and should remain centre stage.
This article was first published in Global Custodian on June 12, 2023.