For more information on the seven areas that will be impacted by U.S. T+1 and how to prepare, read the article below
In 2024, all U.S. trades will need to settle on T+1, or one day after they have traded. The move from the current T+2 cycle will aim to reduce settlement risk, and reduce liquidity, margin and collateral requirements.1 Other countries across the world are assessing similar moves.2 In addition to enhancing custody and settlements, the move will have a ripple effect on specific processes in the securities trade lifecycle.
Given that the proposed transition to T+1 reduces current T+2 processing time by half, and is likely to spur wholesale market infrastructure, technology, and behavioral changes for market participants, asset managers and financial institutions should begin to review their trade processes and operating models now to be ready to meet the 2024 implementation and its wider reaching impacts.3
As part of this process, it will be critical to work closely with service partners, applying digital solutions and ensuring real time access to data through analytics and oversight tools, to optimize trade processes and help get ahead of the compressed timeframes. As a custodian, BBH has assessed which processes need to be optimized for the T+1 accelerated settlement plan and is investing in the necessary technology to facilitate the move and partnering with clients to share insights.
Practical Steps to Process Optimization
Trade allocations, affirmations and turnaround times: A move from T+2 to T+1 compresses the available post-trade processing time from 12 core business hours in a T+2 environment to two core business hours between the end of the trading window and the start of the settlement window.4
A compressed timeframe translates into operational considerations for all firms operating in European securities markets as well as for investors from other regions, for whom time zone differences will impact the possibility of same-day matching processes. In other words, the time to communicate and resolve any breaks or exceptions will reduce. One area that firms may wish to consider is whether pre-funding of liquidity and matching of instructions can be done ahead of trade settlement.
Foreign exchange pre-funding and other operational impacts: A shorter settlement cycle impacts cross-currency transactions which have an FX component. FX trades, which currently settle on T+2, would either need to be booked on the same day/T+1 or alternatively pre-funded, meaning all participants in the settlement chain will need to confirm the transactions on T0.
Securities lending and the compressed timeframes for loan recalls/reallocations: Settlements currently rely on bilateral processes between custodians and third-party lending agents, as well as between the borrowers and the vendors. Moving to a T+1 cycle compresses the timeline to identify and recall securities. A modification to existing loan recalls and reallocations processes, technology and overall behavioral changes are needed to avoid breaks in the process, and an increase in settlement fails and cash penalties that would result.
Corporate actions: There will be a shortened timeframe between ex-date and record date, meaning that firms will need to review market practices around corporate actions notifications and responses to events with their custodian and update the key dates. Failure to do this could result in a significant increase in reverse market claims.
Cash and liquidity management: Cash and liquidity management will be compressed into a shorter timeframe, to ensure that the correct funding is in place in time for settlement. For example, current liquidity for cross-currency transactions with an FX component will need to adapt from T+2 to T+1 to avoid settlement issues for the contingent securities transaction. An important consideration for firms will be to work with brokers, dealers and other counterparties to agree how liquidity can be freed up sooner and work closer together on chains of transactions which can impact on T+1 settlement capability.
Batch processing/reporting: Firms can schedule this to happen on T0 to get ahead of T+1 requirements.
Asia trading/client impacts: Asia is likely to be the most impacted by the move to T+1 in the U.S. market due to time zone differences. All post-trade activity would need to be completed in two hours. While the Indian market adapts processes to T+1 on a specific fund/client basis, elements of optimization might be possible to set up in terms of process design. It is important to review which operational tasks can be done on T0, such as matching and confirmations, so that no further action is needed when Asian markets wake up on T+1.
In addition, asset managers and financial institutions may also need to consider the impact on these business areas:
ETFs: A shorter settlement cycle will have an impact on ETFs, whose current settlement rates are below market averages. As ETFs holds baskets of securities often across a number of markets, any shortening of the settlement cycle on those underlying holdings can impact the settlement of the ETF shares for certain order types. BBH sees ETF settlement delays currently in a T+2 environment as a result of time zone differences, market holidays and cross-border settlement complexity. These considerations would be even more pronounced in a T+1 environment, meaning that subscription to and redemption from ETFs will need to be scheduled differently with T+1 timing in mind.
Similar considerations will also exist for securities-based derivatives, for example where investors seek synthetic exposure to an underlying security through a swap arranged with a prime broker. To avoid basis risk, it would be expected that the swap also follows a T+1 settlement aligned with the underlying security. Further assessment is required to identify impacts to the swap lifecycle, such as margin calculation and collection.
Prime Brokerage: Executing brokers would need to communicate trades on T0 rather than T+1 as is now.
How BBH Can Help
BBH is undertaking its impact assessments of the main process areas and can partner with firms to share learnings and insights.
This becomes even more important given that other markets – Canada, India, the U.K. and those in Europe - are considering moves to shorten settlement cycles further to T+1.
It will be critical to streamline post-trade processes through automation and an optimized data management strategy. Real time access to data through analytics and oversight tools will help firms prepare for shorter settlement cycles and meet the overall goal of efficiency and reducing settlement fails.
For more information, contact your BBH representative and follow BBH Market Insights on LinkedIn where we will be sharing further learnings on this topic in the coming months.
3 The Depositary Trust and Clearing Corporation (DTCC) targets a proposed for go-live around Q1 2024, likely March 2024, with a possibility to extend the schedule to Q3 2024 if needed
4 BBH assumes settlement teams operate in core business hours of 08.00 to 18.00, and that the trading day concludes at 16.00
Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries. This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2022. All rights reserved. IS-08443-2022-10-07