“Everything Everywhere All at Once” recently won an Oscar for best film at the Academy Awards. Without leaking any spoilers this quirky and surreal comedy drama is about a laundromat owner who stumbles upon an alternate universe as she tries to deal with life’s everyday challenges.
The film’s title struck me as very apt to my recent work life and a particularly seismic shift in our industry, namely the impending impacts and challenges of the shortening of the settlement cycle in the U.S. The move from T+2 to T+1 feels like we’re all stepping into an alternate universe of our own, as it becomes more apparent what it means not just to U.S. securities settlements specifically, but to the entire global operating models of banks, asset managers, brokers, and everything and everywhere in between.
The buy side’s initial reaction to the formal implementation date of U.S. T+1, set by the U.S. Securities and Exchange Commission (SEC) for May 28, 2024, was largely this: “It’s a post-trade issue that seems important, so I’d better check in with my custodian that they are on top of things.” That’s a sensible thing to do, but there are many other elements to check on their own side such as pre trade funding, cash management, fund share redemption cycles, corporate action deadlines, liquidity management, trade confirmation and affirmations, foreign exchange constructs, levels of automation and operational efficiency for global operations related to U.S. securities trading.
Concerns have already been raised by those closest to the implementation details that the deadline is hugely challenging. While some are questioning if it will be moved, plan for the worst and hope for the best is a good rule of thumb when it comes to large scale implementation deadlines such as this one.
Other questions being posed by firms include:
- Has anyone checked if we have planned capacity our side to manage all these changes?
- Who actually “owns” a change project that spans our entire trading lifecycle from securities to foreign exchange and securities lending?
- Have we considered the costs to implement the behavioral, structural, operational, and technological changes we need to execute these much-constrained settlement cycles?
T+1 is Everything
T+1 is not merely a broker or custodian issue. Large scale changes are required on a global basis to accommodate the shortened trading cycles for the world’s largest and most important capital market. Buy side engagement across every aspect of trading including U.S. securities or currency is critical. Failure to engage could result in inefficiencies, increases to trading costs, trade failures and corresponding interest claims and buy-ins, spikes to buy ins and sub-optimal client engagement as these issues and costs become more apparent.
The sharing of responsibility for the delivery is an important dialogue between buy side and sell-side and there are choices to be made regarding who bears the respective direct and indirect costs of this large-scale change. We saw this in Europe recently, where the Central Securities Depository Regulation (CSDR) remained a sleeper issue until industry finally woke up and realized it was complex, had a strict deadline, involved multiple stakeholders (not just a custody/CSD issue) to trade activity and had unforeseen consequences and costs for participants in the securities lifecycle.
T+1 requires engagement early and often between buy and sell side participants on these key areas:
- Education (industry updates)
- Best practices (industry advocacy forums)
- Increased automation and a focus on operational efficiency
- Assessment of all activities including securities lending and foreign exchange globally
T+1 is Everywhere
While “U.S T+1 settlement” is construed by many as a U.S. market issue, it is very much a global issue. With trading activities inevitably having some exposure to U.S. securities or foreign exchange directly or indirectly, T+1 is an everyone issues to be addressed accordingly.
Ensuring operational coverage globally in constrained timelines is a key consideration when time becomes an increasingly important asset within global trading. Canada is matching the implementation date of the U.S. change and the North American actions have spurred other countries and regions to explore shorter settlement cycles with the U.K. and European Union already assessing the move. Similar discussions are also being had in Australia, India, Asia, and Latin America as the world wants faster and more efficient trading where possible.
It seems inevitable that the global markets are trending towards shorter settlement cycles. This makes it a good opportunity for both buy side and sell side firms to strategically look at their entire operational model to ensure it is flexible and efficient enough to gravitate towards an era of increasingly constrained timelines for trading on a global basis. While the changes are happening everywhere, the nearer one is to the epicenter of the change the less time impact will be felt. That makes the Asia the most impacted by U.S. T+1 and traders in the region will need to review considerations in further detail due to time zone challenges.
When viewed through a strategic lens, however, the U.S. T+1 cloud has a silver lining and an presents an opportunity to redesign or remove poor practice and possibly move to a more automated, efficient and less risky trading model. Data solutions and other outsourcing support can be leveraged to support T+1 processes. The time is now to assess which of these are necessary and if current state operational models will be sufficient to meet the shortened settlement cycle challenges before the aggressive deadline.
T+1 is All at Once
Our first pass at buyside interactions on T+1 reveals differing degrees of awareness, (un)preparedness and a fair degree of uncertainty. The primary focus is on what would a simulation of our current trading process look like in a T+1 world? This exercise elevates consideration of how much complimentary technology and automation solutions may be deployed now to support ultimate readiness.
While a slow response to the T+1 news is inevitable, the deadline set by the SEC means participants will soon need an end to end project plan before the deadline hits like a wave and participants feel stuck in an alternate universe of constrained settlement cycles globally that they didn’t properly prepare for.
The time to start planning is now. As well as reviewing capacity, coverage, and costs needed for shorter cycles, a review of automation and data solutions as well as other outsourcing solutions to support readiness would be beneficial. For example, an historical trade settlement analysis could reveal which areas and asset classes will be impacted the most. An assessment of process areas such as foreign exchange, securities lending and corporate actions is also critical.
For more information on the impact to these process areas, and the tools and solutions to help you prepare, reach out to your BBH representative and follow our dedicated T+1 microsite for more insights.
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