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T+1 Countdown: A Launch Status Check

By Brian Steele, DTCC Managing Director, President Clearing & Securities Services | 5 minute read | April 11, 2024

All systems are a “go” and we’re nearly ready for the launch of the US T+1 settlement cycle on 28 May. Once the “switch” happens, we’ll start to reap the rewards of such a significant effort: having a shortened settlement cycle will ultimately deliver greater operational efficiencies and reduce margin requirements, while taking risk out of the financial system.

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It’s been an enormous undertaking since the SEC adopted rules to move to T+1 for US markets back in February 2023, with financial market participants from all over the globe taking part in preparations to ensure a smooth transition. Additionally, markets in Mexico and Canada are also planning to move to T+1 the day before the US. We’ve been happy to see such an incredible amount of support, collaboration, and coordination across the industry so far. Virtually all of the largest 50 firms have completed testing with the National Securities Clearing Corporation (NSCC), representing 98% of volume. At The Depository Trust Company (DTC), 100% of the top 50 firms have completed settlement testing, representing 95% of volume. Through it all, there have been no significant client issues during testing, and we are confident that our preparations will enable a smooth transition to T+1.

While many are excited about the benefits T+1 will bring, it doesn’t come without challenges, and we’ve learned some important lessons along the way. The most important is this: firms must continue to automate their post-trade processes. For instance, utilising a central matching platform allows clients to automate the affirmation process. Most clients using such a workflow today are nearing 100% same-day affirmation rates, reducing fails and alleviating capital constraints. In addition, leveraging platforms that can enrich those matched trades with up-to-date electronic SSIs from an online global, golden-sourced database supports timely transaction settlement and minimises trade exceptions or fails due to incorrect data.

With less time to settle a trade, firms have less time to work out their funding requirements for different currencies in foreign exchange (FX) trades. They also have less time to “recall” securities in their stock lending programs, which can create capital constraints. We continue to encourage collaboration between investment managers and their custodians to optimise settlement workflows and we have experts available to help you to find ways to optimise your settlement processes, using data, analytics and industry connections.

Another challenge has been ensuring our global clients are clear on the role affirmation plays in the US settlement process and our collective march toward same-day affirmation underscored by the new SEC requirement. Under today’s T+2 timeline, approximately 90% of all trades are affirmed by 11:30AM ET on T+1, the current affirmation cut-off. Under T+1, the end game is to improve these rates to achieve the required 100% affirmation of all trades by the 9PM ET cut-off on trade date. In February 2024, 74.5% of transactions were affirmed before 9PM ET on trade date.

Let’s take a step back and examine how this process works. Remember, affirmation happens when the institutional investor – or its representative – agrees to the details of a trade, as confirmed by the broker-dealer. The US settlement cycle is unique, differing from what occurs in other markets globally. Outside of the US, affirmations are generally embedded within the depository system in what is known as pre-settlement matching between the local broker and the local custodian (acting on behalf of the buy-side firm). In the US, affirmation is a first step that takes place before the instructions for settlement are sent to the depository. Under T+1, this first step of trade affirmation should happen by the DTC 9PM ET cut-off for the trade to be eligible for the netting process at NSCC. Netting reduces risks and frees up capital for the industry by consolidating the amounts due from – and owed to – a firm.

Importantly, missing the 9PM ET affirmation cut-off doesn’t mean the trade failed. That’s because affirmation is not the same thing as settlement. If you miss the 9PM ET affirmation deadline, you still have options. The trade’s delivering party can issue an order to DTC for night or day delivery. These delivery orders come with higher costs – without netting, more shares have to be allocated to fill trades. Still: with delivery orders, you can miss the deadline and get your trade settled on time for T+1.

Ultimately, operating under a compressed T+1 timeframe will require resilience. Firms need to be agile if there are any challenges that come up during the settlement process. The ability to quickly recover from any issues – and still settle on time for T+1 – is critical. That’s why we launched the rigorous testing period, which began last August and will continue right up until the T+1 transition weekend, allowing firms to conduct multiple dress rehearsals and test many different scenarios. We also have conducted a series of tabletops exercises with individual firms to work through potential disruptive events in a T+1 environment. We continue collaborating with SIFMA and ICI ahead of transition weekend, and we encourage you to review our T+1 Conversion Guide, which outlines the critical steps that we’ll take as part of the industry’s command centre, including monitoring processes and providing status updates to clients over Memorial Day weekend.

Of course, the work doesn’t stop on 28 May. Last month, a taskforce in the UK recommended that markets in the European Union and UK move to T+1 by the end of 2027. In addition, officials in APAC are also considering moving their own markets to T+1. At DTCC, we’re participating in T+1 working groups with our peers globally and will continue to use the lessons we’ve learned in North America to help guide global markets in their own journeys to shortened settlement. Beyond that, we’ll continue our work at DTCC serving as a partner to the industry, to drive risk reduction, resilience and capital efficiencies through innovative ideas and solutions.

This article was originally published to Global Custodian on April 10, 2024.

Brian Steele
Brian Steele

DTCC Managing Director, President, Clearing & Securities Services