This article was first published in Global Custodian on July 31, 2024.
There are early indications that T+1 implementation in the US has been a success and led to the wide adoption of best practices in post trade processes. This assessment is supported by key DTCC data points, with the overall rate of transactions affirmed by 9:00PM ET on trade date having risen from 73% in January 2024, to 94% post T+1 implementation.
With this successful implementation, consideration is now being given to T+1 implementation in other markets such as the UK, Europe and Switzerland.
Related: Why UTIS are critical for accelerated settlement
Key Takeaways
A recent webinar, hosted by DTCC with participation from industry associations, consultants, and market practitioners, included a discussion on insights gained from the US T+1 implementation, which can now be leveraged by other jurisdictions as they consider making the move to a T+1 settlement cycle. Four key lessons were highlighted.
First, there was agreement that collaboration amongst industry associations, regulators, and market participants through numerous working group sessions and the development of playbooks were key to the successful implementation. The co-developed T+1 Securities Settlement Industry Implementation Playbook was cited as a key resource which provided a detailed approach for T+1 readiness, including potential impacts, implementation activities and timelines, dependencies and risks. SIFMA’s T+1 Command Center, which provided insights into the preparations of market participants and served as a platform for issue identification and sharing was also commended as a key T+1 enabler, as market participants could ask direct questions to a board of experts in real time including prior to, during and post implementation. DTCC consultants helped ensure industry readiness by sharing their expertise with market participants, helping drive the optimization of their settlement processes by running infrastructure diagnostics design solutions and providing support to efficiently deliver these solutions.
Second, a crucial driver behind the smooth T+1 implementation in the US was the joint education and communication across the global financial services community. Market infrastructures and industry associations like SIFMA and ICI, alongside broker dealers and custodians, invested significant resources into client education, with participation from all groups to specifically help educate the buy-side on the new regulation.
Third, testing was critical to success. In the US, nine months of end-to-end testing, from trade execution to trade settlement was conducted by DTCC alongside the industry. The industry testing program included opportunities for free-form testing as well as scenarios such as non-standard settlement, including production holiday processing, corporate actions, and double-settlement days. Firms could also participate in as many testing cycles as they chose to.
The fourth point, which many organizations highlighted as key to success, was that post trade automation was critical to smooth implementation. As organizations prepared for the move to T+1, many of them adopted automated post-trade solutions, such as for realtime trade matching and to drive efficiencies in the allocation and affirmation process, helping to avoid settlement delays and issues.
From an operations perspective, many providers explored client behaviour by looking at client metrics before the transition, to better understand why trades were failing. This approach helped minimize the chances of trade fails within a shortened settlement cycle. DTCC data shows that T+1 trade fail rates remain broadly consistent with the May average under the T+2 regime, despite some earlier concerns that fails might rise sharply. The average historic CNS Fail Rate in May is 2.01% which rose slightly to 2.30% post T+1 and remains within historical norms.
Benefits
During the discussion, participants also highlighted the early benefits that market participants have observed post T+1 implementation. Most significantly, there has been a reduction in liquidity risk and improved liquidity. DTCC statistics show there has been a significant decrease in the Clearing Fund Requirement in a T+1 environment. The NSCC Clearing Fund reduced by more than 28% from the past quarter average of value from US$12.8bn to US$9.2bn, a savings of US$3.6 billion.
Other benefits highlighted are a reduction in market risk due to the shorter settlement period, as well as operational risk, which has been significantly mitigated due to the increase in post trade automation and decrease in manual processing. The improvement to affirmation rates demonstrates that T+1 has delivered operational efficiency, which should have a positive ripple effect on the financial ecosystem.
A month into T+1 implementation, positive feedback from market participants, that is supported by post trade data, suggests that as anticipated, significant risk mitigation and greater operational efficiency have been achieved with the shortening of the settlement cycle. These tangible results, combined with the knowledge acquired during the US transition, should encourage other jurisdictions to consider accelerating their plans to shorten their settlement cycle. While other markets such as Europe have a much more complex financial market ecosystem and infrastructure than the US, the key drivers to success, and the benefits of a shortened settlement cycle should still apply.