Conversations heating up around accelerated settlement, operational efficiency.
Over the last 30 years, there have been several major industry developments and changes, including the acceleration of settlement cycles in the U.S. from T+5 to T+3, and then T+3 to T+2. As the U.S. and Canada now eye a move to T+1 on 28 May 2024 following India’s move in 2022, conversations are once again heating up around the topic of accelerated settlement.
Related: T+1: How the Shortening of the USA Settlement Cycle May Impact APAC
One specific issue that was identified in a Q1, 2023 ValueExchange survey was that many respondents didn’t know their plans around T+1 preparations in key areas, such as when they expected to complete core processes, what time they would conduct recalls, when they will do foreign exchange and even when T+1 projects would run or how much they would cost. Since the ValueExchange survey was conducted, the good news is that many firms have begun to understand and identify how the move to T+1 will impact them, and they are actively reaching out to solution providers, along with their counterparties and agents, to discuss specific implementation options and the implications of various workflows.
Dispelling Assumptions
That said, there is a common misconception among institutional investors in Asia-Pacific that the operational burden required to move to T+1 will be managed by their custodians and brokers. This was the case with the U.S. move to T+2 in 2017, where buy-side firms were able to delegate the operational heavy lifting to their custodians and counterparty brokers. Due to the compressed timeline for T+1, however, it is important to note that buy-side firms will need to be more actively involved this time around.
Under the new U.S. T+1 mandate, buy-side firms will need to actively ensure the affirmation of trades – i.e., the post-trade, pre-settlement process – be completed by the designated industry cut-off time of 9pm ET on trade date or no later than the U.S. Securities and Exchange Commission (SEC) deadline of the end of the trading day – referred to as same day affirmation (SDA). Under the new SEC rules, U.S. brokers are required to implement policies or agreements designed to achieve SDA. To meet these new U.S. broker expectations, buy-side firms can perform the affirmation themselves or delegate this task to their custodians, but regardless of how this is performed, the buy-side retains the responsibility either way.
Related: Early Indicators Point to T+1 Testing Success
Demystifying Affirmation Process
Trade affirmation is a critical step in post-trade processing when trading in U.S. markets. An affirmation is an action taken by the institutional investment manager, custodian or prime broker to agree to the details of the trade, such as the identities of parties involved, standing settlement instructions, and settlement accounts at the depository. This process is akin to the pre-settlement matching or pre-matching process that takes place across Asia-Pacific markets.
The purpose of the affirmation is to ensure that all trade details, including allocations and standing settlement instructions, are matched and confirmed by both sides of the transaction so accurate information is sent to the local depository; in the case of the U.S. markets, this is the Depository Trust Company. The affirmation process helps to ensure that settlement will happen smoothly and that the only reason that settlement will fail is because of insufficient securities or funds – there should not be a settlement failure due to a mismatch in instructions.
Explaining Trade Matching, Allocation
As trade matching and allocation are common terms used in post-trade processing in Asia-Pacific, there are questions on the difference between trade matching and allocation and affirmation.
In general, upon the completion of a trade, matching and allocation are the initial steps in post-trade processing where market participants can leverage automated central matching solutions to efficiently assign or allocate stocks to the respective funds and match relevant trade details. The entities involved could vary depending on the specific arrangements made by the institutional investment manager. On the buy side, matching and allocation can be done by the institutional investment manager or an outsourcer. On the sell side, the counterparty can be the broker located in the same country as the institutional investment manager. For example, an institutional investment manager in Korea investing in the U.S. market is served by a Korean broker. Alternatively, the trade matching process could be managed by a global securities firm in Hong Kong, or the institutional investment manager could be dealing directly with a local broker in the U.S.
There is a common misconception among institutional investors in Asia-Pacific that the operational burden required to move to T+1 will be managed by their custodians and brokers.
The key difference between trade matching and allocation and affirmation for institutional post-trade processing: the former is needed to successfully facilitate settlement while the latter, specifically same day affirmation, is now expected of broker-dealers subject to the SEC’s New Exchange Act Rule 15c6-2. As there is no single global regulator governing the matching and allocation of institutional trades, market participants can look to platform providers for solutions and best practices to ensure standardization and efficiency.
Not surprisingly, the level of automation in the post-trade space has increased significantly over the years, supporting the various approaches to the trade matching and allocation process as settlement times compress. As firms consider their preparations for T+1, and how they can successfully achieve SDA in line with SEC recommendations, automated post-trade, pre-settlement central matching solutions, such as the Depository Trust and Clearing Corporation’s (DTCC) central matching platform, CTM®, should be considered. Without an automated central matching platform, parties typically perform these activities by exchanging excel files or emails, a manual approach which can be error prone, may result in costly delay and may hinder the achievement of T+1.
Moving Forward
Given that there are varied approaches to the trade matching and allocation process, the big discussion that has been taking place now hinges on operational efficiency. In addition to a thorough review of the trade lifecycle to identify and determine the action or responsibility for each activity, replacing manual or batch processing with real-time automation and straight-through processing are must haves to ensure that there are no operational hiccups or breaks in the process. And, given that industry-wide testing for T+1 readiness has now commenced on August 14, 2023, firms in Asia-Pacific should be well on their way with T+1 preparations and testing.
This article first appeared in The Asset on August 25, 2023.