In just 5 minutes, we’ll explore the world of post-trade financial services by way of new ideas, insight snippets, emerging trends, and thought-provoking questions. In this episode, David Kirby, Securities Practice Head, DTCC Consulting Services, discusses what lies ahead for custodians, buy-side and sell-with the move to U.S. T+1 just over a year out.
From DTCC, you're listening to Take 5, a bite-sized post-trade financial services podcast that tackles an industry topic or trend in just five minutes. Tune in to hear a DTCC executive share their perspective on how to grow, prosper and protect the global financial markets. There's a lot to uncover in five, so let's start the clock.
Hi everyone, my name is David Kirby. I lead our Consulting Services practice on the securities side, and we are here to talk about T+1 in the U.S. today. It’s been a lifelong dream of mine to film and record a podcast. I’d just think in baseball season it would be about the Yankees vs Red Sox rivalry, but today, we are here to talk about T+1 instead.
We are going to cover a few topics today. We are going to start with what we know, then we’re going to go into what we don’t know, and we’re also going to continue to what firms really should consider in their preparation for T+1.
What we know – T+1 is happening in North America in May of 2024. The U.S. and Canada are somewhat aligned around Memorial Day weekend, there’s just a slight difference in date where double settlement will occur – U.S. is going to happen on the Tuesday, Canada is going to happen on the Monday. There are processes that will have to be considered from your firms, depending on where you sit, to account for both.
What else do we know? Requirements have changed, especially for broker-dealers and buy-side firms. The affirmation process has to happen by 9 p.m. Eastern on trade date – that’s a change from the current requirements now, which are T+1. And there are documentation requirements that have to change for all, those are things you need to contemplate with your own legal departments and see how they impact you.
What don’t we know? Based on a recent survey we completed with the ValueExchange, there seems to be a broad scale of things we don’t know as an industry:
- What time will firms complete their core processes?
- What time will FXs be completed?
- When will T+1 projects run?
- How much will projects cost?
We don’t know when firms will be ready for T+1.
Those are a lot of things that firms need to consider ahead of building a project, building a program on your side.
That brings us to preparation. What should we think about from a preparation standpoint for firms? I think first and foremost, firms need to think about their impact assessment. Impact assessments are different depending on where you sit. From a buy-side firm, some things you need to consider is:
- When is your allocation process happening?
- What are the tools you’re using for your allocation process?
- Who’s affirming?
Those are just three things to consider.
There are things that you need to consider from a client-side, especially on the buy-side. Broker-dealers side and Custodians, we can really think about a couple of different things. Where are your clients? Part of that ‘what we don’t know problem’ is how your global client base is really going to handle the time zone changes. If you think of your clients that are sitting in APAC region, they’ve gone from having a full day of reconciling issues to having potentially two hours at the start of their day to reconcile differences. So how are broker-dealers going to look at their impact, look at their target operating models and figure out, how are you going to support your global client base ahead of T+1? Those are just some of the things we’re considering, but it’s all based on an impact assessment that firms need to complete before T+1.
Then we go into the FX issue. Exactly how are people going to handle FX? If you sit on the buy-side, are you going to actively manage your cash? Are you going to actively rely on your custodian? How are you going to handle that? The answer is different depending on which firm you speak to, but it is back to impact, and where this part of the process impacts you as a firm.
Same can be said about securities lending. What do your lending programs look like and what does that new end of day recall deadline at 11:59 mean to you, as a firm, depending on where you sit? Do you use lending agents? Do you rely on partners? Do you manage your own book? So, depending on where you sit in the lifecycle, and where you sit, from, I would say is an active management of securities lending book, much of that may need to change from a timing perspective -- all things you need to consider.
The last thing I would say from a programming perspective is testing. Have you considered what testing looks like for you? DTCC has a testing program built, in place right now, that will kick-off in August of 2023. We anticipate twenty-one 2-week testing cycles, that we have an integration team that handles and will partner with firms to handle the testing process. However, there is an entire upstream effect depending on the amount of impact to your firm, that things need to be tested. Test plans need to be created going forward, so you understand from the start of the trade all the way through to settling, what areas of impact will be required to be tested, going forward into 2023. All things we need to consider going forward, ahead of T+1 as an initiative.
You can build your own program, you can prepare, you can test, but if your counterparties are unprepared, then that is going to have an impact on your overall performance when it comes to T+1. So, your counterparties, especially where you’re sitting on the broker or the custodian side, you need to consider your counterparty behavior ahead of it.
- Do you have manual clients?
- Do you have clients who are not affirming or sending allocations by the deadlines now?
- In a T+1 environment, those deadlines move forward as we discussed. So, what is your counterparty behavior?
- Or what does that counterparty behavior look like now and how is that going to impact you for T+1?
These are questions that firms need to answer and that can go from the buy-side – how your partners are handling T+1 going forward – to the sell-side, which buy-side firms are impacting your ability to match on T+1? And then, from the Custodians, who’s relying on you for the affirmation process? A lot of things to consider as an industry and these are just some of the highlights that we need to look at in order to really facilitate a more efficient process going forward into T+1.
If you need help for this, there are tons of resources available both through the DTCC and otherwise. We have a Consulting Services practice that is dedicated towards securities and post-trade efficiency. We can help you with an impact assessment, we can help with counterparty assessment, and we can help build and execute a testing program. We can also help through our product suites. ITP has an entire suite of products that’s dedicated towards STP on the institutional investor side. Those tools from ALERT to CTM to SSM really bring us forward from an efficiency standpoint.
Lastly, if any questions come up from you or your firm, reach out to the DTCC. We can assist, whether it be through Consulting or through our core practices, we are here to help get the industry prepared for T+1, and I look forward to helping each of you accomplish that.