Blog: BBH on T+1

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We break down the latest updates on the T+1 Settlement transition and provide insights from our conversations with clients, industry groups, consultants, and peers.

T+1 and the Global ETF Ecosystem

T-196 days

- Antonette Kleiser - Chris Pigott

November 14, 2023 - The U.S. T+1 transition will have global impacts for ETFs, with potential for settlement mismatches due to timing discrepancies at the basket security level, as well as between primary and secondary market trading.

Let’s take a closer look at how global ETF settlements will be affected:

  • U.S. ETF Settlements: Creation and redemptions will become more complex for U.S. ETFs with global holdings, which settle outside the U.S. settlement infrastructure. For secondary markets, trading will require creation activity to support shortened settlement, ETF sponsors and APs will need to support a T+0 creation process.
  • European ETF Settlements: Most European exchanges settle on a T+2 cycle. Primary market ETF order activity may need to consider a move to T+1 settlement if most of the securities held in the portfolio are from the U.S. or Canada to avoid overdrafts. This has the potential to create mismatches in ETF settlements.
  • Asian ETF Settlements: Asia-based managers will need a coverage model which accounts for U.S. business hours, where they can monitor and amend their trade instructions during the Asia evening of T+1, if the trades are not matched with their counterparties. The use of pre-funding will likely expand, as ETF baskets with U.S. or Canadian securities will now come into scope.

Read here for full insights around T+1’s impact on global ETFs.


5 Myths and Assumptions

T-218 days

- Adrian Whelan

October 23, 2023 - There’s nothing like a large-scale mandatory market shift with a tight deadline to get our industry talking. As impact assessments evolve and project plans are tweaked to be ready for a shorter securities settlement cycle come May 2024, here are the common assumptions and misunderstandings about T+1:

1. No Big Deal – U.S. Trading is All Automated and Processed Straight Through Already
Although rare, fails do occur even with our sophisticated trading infrastructure today. Focusing solely on the post-trade settlement of the U.S. T+1 compressed timeline overlooks impacts across end-to-end lifecycle management.

2. SEC Didn’t Include Penalties, so I’ll Just Settle Late – There’s Minimal Downside to Settling Late Anyways
This is simply not true. Fails can create downstream liquidity issues, reputational and financial risks, as well as potential regulatory intervention.

3. I Can Already Trade T+1 Today Without Any Issue
With the compressed T+1 deadlines reducing late instruction opportunity for non-U.S. traders, this may no longer be possible.

4. My Bank or Custodian Will Fill in My Liquidity Gaps and Contractual Settlement Risk
Participants must ensure they are aligning their investor and securities cycles or addressing these gaps with providers.

5. I've Got Time – Implementation Will Be Delayed, It Always Is
Industry lobbied hard for a September 2024 implementation, which was rejected. It would be folly to plan for any date other than May 28.

To debunk these misleading assumptions, read the latest T+1 article.


Europe Joins the T+1 Settlement Party

T-235 days

- Adrian Whelan

October 6, 2023 - Following the SEC’s decision to shift the U.S. to a T+1 settlement cycle, many eyes turned to Europe and whether they would be fast followers. Global banks and asset managers are currently discovering how the decoupling of cycles of two of the largest trading markets and liquidity pools brings a range of additional operational complexities.

So it’s no surprise to see that the European Securities and Market Authority (ESMA) has now launched its own T+1 call for evidence seeking industry’s opinions and “quantitative evidence” of the costs and benefits of such a switch. The United Kingdom has already mobilized an industry “taskforce” to assess acceleration of its own settlement cycle, so the global direction of travel remains consistent.

A large caveat regarding Europe (discussed in detail here before) is that although the U.S. and U.K. markets are large, they are also relatively homogeneous compared to Europe’s fragmented and complex trading ecosystem. Synchronization of diverse currencies, centralized securities depositaries, central clearers, and stock exchanges makes the European project far more complex than the U.S. version (and that’s proving to be complex). Therefore, a clear-eyed view on the benefits, risks, costs, and sensible implementation schedule will likely be raised within industry responses.

Industry submissions are due by December 15, with ESMA committing to publishing its final report in Q4 2024, at the latest. While impending changes in U.S. & Canada remain the primary focus, monitoring all T+1 activity globally remains imperative. 


U.S. T+1: Which Bucket Are You In?

T-236 days

- Adrian Whelan

October 5, 2023 - Recent industry engagement on T+1 has received a spectrum of client opinion on its expected impact – ranging from indifference to high priority.

Generally, global asset managers and banks fall into one of three T+1 appreciation buckets:

  • Bucket 1: All Good
    Knowledgeable and engaged, with detailed planning underway and considering impacts beyond specific trade settlement aspects
  • Bucket 2: Pretty sure we’re okay
    Broad awareness with projects underway on specific operational and timeline elements but lacking clarity on end-to-end impacts and interdependencies
  • Bucket 3: Meh
    Apathetic or even unaware of the impacts, primarily seeing the change as the broker’s, custodian’s, or bank partner’s deliverable

While the impact assessment will depend on the specifics of your business model, detailed analysis with clients has shown we expect previously unforeseen operational and regulatory impacts to jump into focus.

There is a real divide – some firms are seen as T+1 alarmists while others seemingly haven’t considered the wide reaching impacts of T+1. However, it’s much more than a trade settlement shift. It’s a re-evaluation of the entire workflow.

So, the question remains, which bucket are you in?


T+1: Hot Topics

T-253 days

- Adrian Whelan

September 18, 2023 - With little over 250 days now left to prepare, we share the regulatory state of play in four key areas.

Testing Times - Industry testing1 has begun, slowly but steadily. DTCC created the ability to test “end to end” in T+1 and T+2 environments concurrently.

A Global Trend? - Will the rest of the world ‘fast follow’ the U.S. and Canada’s lead on T+1? The United Kingdom and European Union are already analyzing the possibility.

Affirmations - Affirmations are proving a robust area of debate across the market given an SEC regulatory mandate for date and time stamping. With optionality in configuration of trade affirmation models, there is no best way to conduct DTCC affirmations. (We take a closer look in the following blog post).

Fund Focus - In European UCITS, there is a sharp focus on alignment of securities and investor trading settlement cycles to ensure funds don’t end up with too much or too little cash due to a mismatch in the securities and subscription/redemption cycles.


Affirmations in a T+1 World

T-253 days

- Derek Coyle - Katelyn O'Grady

September 18, 2023 - Mandatory same-day affirmations inclusive of new procedural and recordkeeping requirements (including date and time stamping of allocations and affirmations) are some of the most challenging parts of the SEC rules to ensure readiness for U.S. T+1 settlement. Different options exist in how affirmations can be processed:

Custodian-supported confirm matching

  • The investment advisor provides trade instructions to their Global Custodian who then matches them against the related broker confirmations in DTCC’s Institutional Trade Processing (ITP) system to complete the affirmation.

Direct Affirmations

  • The investment advisor independently reviews the broker confirm in DTCC’s ITP system to ensure alignment with their own trade details and subsequently completes the affirmation, which is then provided to the custodian as the trade instruction.
  • In addition to the above, the investment advisor may send the trade instruction to their Global Custodian directly. The Global Custodian is then responsible for matching the affirmation from DTCC’s ITP platform to the client trade instruction to prevent duplication of the trade.

It’s crucial that investment advisors choose an optimal operational model which meets their needs to ensure alignment with regulatory compliance, operational capability, time-zone coverage, and other risks in mind.


Synchronicity: T+1’s Greatest Challenge 

T-253 days

- Adrian Whelan

September 18, 2023 - While asset managers and banks have rightfully focused on their own readiness, firms should not lose sight of the impact to their underlying clients and must target settlement alignment across a global network of entities and stakeholders.

Alignment of mutual fund investor and securities settlement cycles has fast risen in focus as U.S. T+1 impact analyses continue. Nowhere is this dynamic starker than in Europe where many UCITS funds have successfully attracted Asian investors, many of which hold U.S. securities.

Synchronizing NAV calculations, investor contract notes, and security settlement cycles remain paramount to raising or protecting UCITS investment from Asia. Cycle misalignment might result in denting UCITS distribution to Asian investors, as well as trade funding issues, overdrafts, trade failure penalties, tracking error and foreign exchange problems.

UCITS funds with European managers and Asian investors raise interesting asset servicing complexity that can only be fully addressed through global service models and efficient technology platforms.


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T+1 Settlement and Beyond

As the world watches the U.S. market plan for a T+1 cycle for securities settlement, other countries are assessing similar moves. BBH is working with clients to help them optimize their global operating models and support their readiness for this major industry shift.

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