Global investment capabilities of Goldman Sachs will benefit UPS pensioners
One of the largest corporate pension outsourced chief investment officer (OCIO) mandates to date
Goldman Sachs Asset Management (“Goldman Sachs”) announced its appointment by the UPS pension plan fiduciaries to provide investment management services for UPS’s US and Canadian defined benefit pension plan assets. UPS’s North American pension plans have a combined $43.4 billion in assets as of March 31, 2024.
The partnership is one of the largest corporate pension OCIO mandates to date and continues the trend of increasingly large and complex plan sponsors seeking robust outsourced solutions for the management of their pension portfolios. The mandate affirms Goldman Sachs’ position as the largest OCIO manager in the US, with over $325 billion in OCIO assets under supervision globally.1
As part of this appointment, the UPS in-house investment management team is expected to join Goldman Sachs’ Atlanta office and to continue to provide investment management services to the pension plans. The team transition helps further Goldman Sachs’ commitment to expanding its Atlanta presence, adding deep pension expertise to its growing local office of approximately 200 employees. It is expected that the asset management and team transition to Goldman Sachs will take place in the third quarter of 2024.
The UPS pension plans will benefit from both continuity and enhanced services through the global investment and risk management capabilities of Goldman Sachs and the integration of the in-house team.
The decision by the plan fiduciaries to appoint Goldman Sachs follows a competitive search process and reflects the firm’s deep experience in partnering with pension plans of all sizes and integrating investment teams. Goldman Sachs has proven strength in liability-driven investing (“LDI”) to help protect pensioners’ benefits, offers one of the world’s leading open architecture platforms, and has extensive investment capabilities and experience across public and private markets.
Marc Nachmann, Global Head of Asset & Wealth Management at Goldman Sachs, said:
“We are grateful to UPS’s pension plan fiduciaries for entrusting us with this significant mandate and we look forward to welcoming a number of talented new colleagues. Outsourced CIO solutions can deliver investment excellence, economies of scale and enhanced risk management while allowing corporate and pension plans of all sizes to focus on their core business.”
PJ Guido, SVP Capital Markets and Investor Relations Officer at UPS, said:
“After extensive evaluation of market trends and asset managers, we are happy to announce that UPS has chosen Goldman Sachs Asset Management to take on this important role. I’m confident this team will ensure strong continuity and best-in-class pension asset management with no change to benefits for plan participants. This decision also allows UPS to place our focus more squarely on serving our customers while adding more oversight and expertise that will benefit retirees.”
By Shai Popat, global head product and commercial strategy, Financial Information, SIX
Shai Popat, SIX
Exciting technological developments often – quite understandably – create a frenzy. But this doesn’t quite explain the AI mania of recent months. After all, AI is by no means a new technology. Its roots trace back to the 1950s, when pioneers began exploring algorithms and machine learning. As for chatbots, the first, ELIZA, was created as early as 1966. Business applications for AI then emerged in the 1980s, notably in expert systems and risk assessment. And in more recent memory, many of us will recall IBM’s Deep Blue beating chess master Garry Kasparov in 1997, when a computer finally bested the human race’s most formidable champion.
Despite its longstanding history, however, the current narrative surrounding AI is dominated by sensationalism and, frankly, misunderstanding. We are bombarded with headlines touting AI as the perfect solution to all our problems, from skyrocketing stock prices to the looming spectre of job loss. But the first dose of reality around AI may have been felt in markets last month, when chipmaker Nvidia’s 10% stock price slump made for its steepest plunge since the start of the pandemic. Indeed, the true impact of AI may take longer to materialize than many anticipated – but that doesn’t mean its influence won’t be profound, especially in financial markets.
Co-bots, not robots
One of the greatest fears surrounding AI is that it could render human expertise obsolete, but nothing could be further from the truth. In the financial sector, AI isn’t about replacing skilled professionals; it’s about enhancing their capabilities. Consider Bing AI, a recent development whereby a search engine is powered by a large language model. This tool doesn’t usurp control from the user. Rather, it streamlines repetitive tasks, providing valuable insights in seconds that might have taken minutes for an expert to gather manually.
This brings us to a crucial point: practical applications of AI are already making a tangible difference. From data mining to language learning models, AI tools are empowering financial institutions to make faster, more informed decisions – and they are doing so now. It is high time we moved beyond theoretical discussions and embraced these real-world use cases.
One example is how AI is revolutionizing client support services. Initially met with apprehension, AI-powered tools are enabling several prominent financial institutions to support their teams to focus on higher-value tasks, ultimately enhancing the quality of service they can offer clients. Far from displacing jobs, AI is enriching employee satisfaction, enabling professionals to concentrate on tasks that require creativity, critical thinking, and empathy – qualities machines may never replicate.
Its potential advantages far surpass mere operational efficiency gains and employee satisfaction, though. It could inform and radically transform many financial institutions’ entire business strategy. By adopting AI capabilities like natural language processing, for example, financial institutions can identify patterns and uncover opportunities that were previously hidden in vast oceans of data. Using a large language model, one can compare and contrast a share price in relation to five other prices. What might have taken an expert on a terminal one minute can now be done in ten seconds. Essentially, the use of a terminal wasn’t necessary, they simply typed in the request and received the share price information they sought instantaneously.
Open to all
Beyond enhancing productivity, profitably and client service, perhaps the most significant impact of AI lies in its ability to propel us further along the path towards fully democratized markets.
Buying shares in the early 1980s was mostly the preserve of the wealthy, with private investors having to telephone their broker to attain the latest price information and place trades, before mailing a cheque. The dot-com boom of the 2000s then helped popularize the early online trading platforms and fund supermarkets. The sector continues to boom and was boosted by the pandemic, which brought with it surging interest in online trading, as people had more free time and – in many households – fewer financial outgoings.
Now, large language models have the power to level the playing field, making complex financial concepts accessible to a broader audience. No longer confined to the realm of experts, critical information – such as portfolio attribution – can now be readily understood and utilized by practically anyone, regardless of their background. While some may view this as relinquishing control to machines at the risk of detrimental market outcomes, AI is not about abdicating decision-making; it’s simply augmenting human intelligence.
If the 1700s to 1800s was about the transition from creating goods by hand to using machines to drive economic progress, what is the difference with AI in the 21st century?
FLASH FRIDAY is a weekly content series looking at the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet, a Nomura company.
Nasdaq announced the new AI powered feature within its Market Surveillance technology solution that will significantly enhance the quality, speed, and efficiency of market abuse investigations performed by our clients. The solution leverages generative AI to streamline the triage and examination process involved in investigating suspected market manipulation and insider dealing, empowering regulator and marketplace clients to more effectively monitor and detect potential market abuse.
During proof-of-concept testing, surveillance analysts estimated a 33% reduction in investigation time, with improved overall outcomes. This represents a substantial gain in investigation efficiency. Nasdaq is planning to leverage the generative AI enabled functionality for its U.S. equity market surveillance.
“Maintaining trust in capital markets is critical to preserving long-term growth and prosperity,” said Ed Probst, Senior Vice President and Head of Regulatory Technology at Nasdaq. “Market abuse is a substantial global challenge and one that demands increasingly sophisticated solutions to address it. As a major regulatory technology provider to the world’s financial system, with a deep culture of innovation, Nasdaq is uniquely placed to leverage the power of technology to further enhance the tools and capabilities necessary to uphold the integrity of marketplaces globally.”
New AI Surveillance Capabilities
In an effort to ensure market integrity and trustworthiness, international regulators require financial institutions to demonstrate the ongoing effectiveness of their surveillance systems and controls. Firms are expected to have comprehensive coverage across their entire portfolio and operations, spanning a broad range of asset classes and jurisdictions, with scalable systems capable of managing increased levels of risk during periods of high volume and volatility.
Today, when analysts receive automated alerts of suspicious activity, they must conduct an initial review and form an assessment of whether the activity warrants further investigation. That typically involves manually collating all necessary evidence, including relevant trading activity and corporate filings alongside a vast array of data from external sources, before deciding whether to continue the review. The process is highly resource intensive, and even more so if the alert warrants further investigation.
Leveraging Amazon Bedrock, an AWS service for building secure generative AI applications, Nasdaq’s enhanced functionality will empower analysts with generative AI capabilities to distill, analyze, and interpret relevant information more quickly, enhancing their ability to form detailed initial assessments of alerts. For example, the technology can produce a consolidated table of the company’s regulatory filings, summaries and links to company, sector, and peer company news, news sentiment analysis, and other mitigating or aggravating factors that may impact any given security.
Tony Sio, Head of Regulatory Strategy and Innovation at Nasdaq, said: “By drawing on the latest innovation in cloud technology and artificial intelligence, we can better respond to new threats and offer the global financial system advanced tools to more effectively tackle market abuse. This is a continuous cycle of investment and improvement in our capability, leveraging our unique position as both a world class market operator and best in class surveillance technology provider around the world.”
Scott Mullins, General Manager of Worldwide Financial Services at AWS, said: “Nasdaq is continuously innovating on behalf of the global capital markets by combining its industry-leading expertise with cloud and AI technology. We are honored to work with Nasdaq as it harnesses the power of generative AI to advance the stability and security of the global financial system.”
Nasdaq’s Expansion of AI Across Multiple Business Units
As a global technology provider, Nasdaq has continuously advanced AI capabilities to support capital markets, enhancing the integrity, fairness, liquidity, and efficiency of the financial ecosystem. This new generative AI functionality has been introduced as part of Nasdaq’s broader research and development effort, focused on transparent, reliable, and accountable AI implementation across the financial services industry.
A major aspect of Nasdaq’s AI strategy has been to accelerate its market modernization effort by improving the quality of its data and surrounding systems while embracing cloud-enabled infrastructure. Nasdaq’s long-term approach to technology and investments has enabled the company to unlock the power of AI by scaling its capabilities, tools, and systems with proper governance, security, and oversight. To date, Nasdaq’s AI initiatives span many of its business units, including North American Markets Services, Financial Crime Management Technology, and Corporate Solutions.
Within North American Market Services, Nasdaq has launched Dynamic MELO, the first SEC approved AI order type, and Strike Price Optimization, a purpose-built program designed to align Nasdaq’s six options exchanges strike lists to market demand. For several years, the Nasdaq Investor Relations Intelligence team has also been employing different types of AI to better serve clients, with a key focus on empowering analysts to uncover new proprietary data and insights more efficiently. In addition, IR Intelligence recently launched Nasdaq Sustainable Lens™, an AI-powered ESG intelligence solution that helps clients make better decisions faster, boost productivity and enhance credibility on key topics such as regulatory reporting readiness and competitive intelligence. In addition, Verafin, which provides Nasdaq’s Financial Crime Management solutions, announced the availability of its Entity Research Copilot, the first of its integrated Copilot capabilities that uses generative AI to automate compliance tasks and daily workflows enabling financial institutions to reduce operational costs and increase the efficiency of anti-financial crime programs.
The Options Clearing Corporation continues to primarily focus on its Renaissance program this year, as the organization prepares to begin external industry-wide testing, according to Mike Hansen, Chief Clearing and Settlement Services Officer at OCC.
Mike Hansen
OCC, the world’s largest equity derivatives clearing organization, received a no-objection notice from the U.S. Securities and Exchange Commission (SEC) in October 2022, enabling the organization to move forward with its Renaissance Initiative, a multi-year investment to comprehensively redevelop and modernize the company’s risk management, clearing and data systems.
“We’re building our new core clearing, risk management, and data management system, Ovation, with state-of-the-art technology in the cloud to provide enhanced efficiency and flexibility for all stakeholders as well as an improved experience using our system,” Hansen said.
He said that Ovation’s modular architecture will allow OCC to quickly and safely create environments for testing new exchange products.
“From a technology standpoint, products may be ready for launch in as little as a month, instead of three months or more,” he told Traders Magazine.
“Data will be better organized and available more quickly. Stakeholders will be able to customize the data they receive so they’re only getting the information that matters to their business,” he said.
Ovation will include what OCC refers to as three different pillars: clearing and settlement, data, and risk management.
“When we roll out testing this year, it will include testing of all three pillars. They are all part of the same system, but because they’re modular, they’re separate components from each other,” Hansen said.
This means that upgrades can be made to individual sections, unlike ENCORE which is a “monolithic” architecture where the entire system must be modified rather than individual parts, he said.
“This enables greater flexibility and efficiency for our teams working on Ovation, which will translate to decreased potential for disruption and time saved for our members and exchanges,” he commented.
Hansen added that as OCC replaces its core clearing, data, and risk management applications with cloud technology, process re-engineering and automation will provide operational efficiencies for clearing members, including improved access and greater transparency into transaction information and history, ability to more proactively monitor the settlement cycle for each transaction, streamlined margin calculations during nightly processing, and access to self-service reporting.
“Ovation’s architecture will provide greater efficiency for margin, stress-testing, and back-testing calculations,” he stressed.
Ovation’s cloud environment will enable OCC to quickly deploy technical upgrades, accelerate time to market for new exchange products, and enhance access to data for our members and exchanges
“Overall, Ovation’s design will not only provide operational efficiencies but also enable future enhancements,” Hansen said.
He added that internally, their teams are busy completing development work and performing quality assurance checks to make sure OCC is ready to roll out certification testing for Ovation to the industry later this year. “We’re very excited to let everyone get their hands on Ovation for the first time,” he said.
Hansen said that testing is mandatory and will cover data exchange with OCC.
Following that will be testing daily processing environments and ad hoc testing by exchanges and members, he said.
“We anticipate external testing for Ovation to continue until launch in 2025,” he commented.
Technology transformation continues to be top of mind for the industry and OCC because the newer technology available today, such as the cloud, DLT, and AI, is very different from what we had years ago and has the potential to enable financial infrastructure organizations like OCC to enhance their resiliency, security and scalability to the benefit of all market participants, according to Hansen.
For example, he said, Ovation will be built with modular architecture, allowing OCC to quickly and safely create environments for testing new exchange products.
OCC can also utilize automation to remove much of the manual system work that was previously involved with onboarding new products, he added.
“From a technological standpoint, products can be fully tested and demonstrate readiness to launch much more quickly,” he said.
Hansen further said that use of the cloud will also offer improvements to how their stakeholders access their data, as it will be better organized and available more quickly.
“In the future, we’ll also be able to offer even greater benefits and customization through API access,” he said.
Delivering Ovation and the associated work involved with this transformation will help provide the foundation for continuous improvements going forward, Hansen said.
“Essentially, Ovation’s design will provide operational efficiencies and facilitate future enhancements,” he said.
By Dan Miller, Senior Managing Director, Outsourced Middle Office Services at IQ-EQ
Dan Miller
With the US adopting a single-day settlement trading framework at the end of May, many managers are scrambling to ensure their trading architecture can handle a one-day settlement process. But why is it so difficult?
It’s been seven years since the US shortened its settlement cycle to two days, but US asset managers are still struggling with the idea that by the end of this month, they will be required to settle trades in a single day.
The shift to T+1 has been in the works for quite some time. Historically, we’ve seen a variety of settlement times, from T+2 and T+3 all the way to T+5, to settle securities transactions. However, a single-day settlement requires a variety of operational changes that make this new timeline uniquely challenging for many asset managers.
In February 2023, the Securities and Exchange Commission announced the deadline to shorten the US settlement cycle to one business day after the trade date, which would go into effect on May 28, 2024. This gave asset managers and financial institutions a little over a year to reconsider their internal infrastructure and technology to allow for single-day securities settlement, a much more complex ask than it may seem.
The operational hurdles
To understand why the shift to T+1 requires managers to reconsider their tech stacks, it’s important to recognize exactly how a trade is settled and what it entails.
When you buy a security, such as a stock or bond, the brokerage firm inputs the order on the market and the trade is executed. Under a single-day cycle, that order is settled the next day. Even in a T+1 world, trades are not settled instantaneously. By the time the trade is fulfilled, stock prices may differ from the purchase price. In a volatile market, these prices may fluctuate significantly, leading to massive amounts of capital hanging in settlement limbo. The move to T+1 cuts that current limbo-time in half.
However, this condensed settlement cycle also brings with it a variety of challenges for managers to meet the new regulatory requirements.
One significant barrier is the global workings of the market. For managers trading US securities, they may be required to hold US operational hours in order to support settlements on a T+1 scale, whether that’s hiring in-house employees who hold conventional US hours, or outsourcing to a provider in the US that operates on local US hours.
A regulatory shift like this brings with it a headache of operational changes. The complexity of the T+1 cycle also differs based on the manager, as well as their specifics when it comes to how often they trade, who they are trading with, and how they’re trading. Those with more partners, such as multiple prime brokers or custodians, will have more infrastructure changes needed to support the condensed trading timeline.
In recent years, the shift toward buying tech stacks from vendors has increased as allocators pressure to lower fees continues to impact margins and firms are no longer comfortable with significant investments in back-office technology that will inevitably need to be amended to meet future operational changes. Whether shops decide to buy or build, the thought process around designing trading infrastructure should be similar to buying kids clothes, you buy a size up and the kids grow into them. That’s how managers need to be planning for the T+1 adoption. While it’s currently a single-day settlement we’re preparing for, real-time trading is a very real possibility on the horizon.
How Europe can learn from the US
As Europe is potentially a full 18 months (or more) behind the US when it comes to T+1, there are quite a few managers across the pond who will be able to learn from US-based managers once the May 28 implementation deadline occurs. However, there are also key differences between the US and European markets that will create additional barriers for European managers.
The US has a relatively consolidated exchange landscape compared to Europe. The fragmented nature of various jurisdictions and clearing houses in Europe means there is a much wider gap when it comes to consolidating for a single-day settlement cycle.
The cost of compliance
Increased regulation, while imperative to a functioning economy, also brings with it added costs, along with the benefits of transparency for investors. The shift to single-day settlement has a host of costs, including the technology and infrastructure to support the necessary reporting and trade execution. However, the importance of settling a trade within one day is not only important for the funds to meet their regulatory requirements, but also in the best interest of the limited partners (LPs) who are providing the capital for the funds, because at the end of the day it’s their money that’s being traded on the market. In many cases, expenses associated with T+1 trading will be allocated to the fund vehicle for the LP to ultimately pick up the cost, instead of the investment manager taking the full brunt of the expense.
What next?
Only after the T+1 trading settlement cycle goes into effect will we see if managers have properly prepared themselves to handle a single-day settlement timeline. This is, in some way, a test run for the future of instantaneous, real-time trading, or T+0. While back in 2017 amid the shift to T+2, real-
time settlement felt like a far-off alternate reality, it’s clear that the market and technology have advanced enough to make real-time settlement no longer a dream, but a feasible option in the near future. And something that occurs in the Digital Asset space, every day.
The New York Stock Exchange, part of Intercontinental Exchange, Inc. (NYSE: ICE), a leading global provider of technology and data, has announced the formation of the NYSE Tech Council, a group of senior technology leaders within the NYSE community that will focus on thought leadership and actionable best practices.
Lynn Martin
The council will be comprised of Chief Technology Officers, Chief Information Officers and other C-suite technology leaders from NYSE-listed companies. With technology evolving rapidly, the NYSE Tech Council’s initial focus will be cybersecurity matters and AI use cases. The NYSE Tech Council will operate in a similar fashion to the other NYSE thought leadership councils, which address topics of interest to the 2,400 issuer-strong NYSE community.
“In this digital age when virtually every company is relying on rapidly evolving technology to transform its business, the new NYSE Tech Council will play a pivotal role for our remarkable NYSE community,” said Lynn Martin, President, New York Stock Exchange.
“Companies list their shares on the NYSE to raise money and change the world, and through its actionable insights the council will further support our issuers in pursuit of their technology driven goals.”
“At this unique time, we believe no group is better positioned than our NYSE community to understand technology’s vast opportunities and implications,” said Chuck Adkins, Chief Information Officer, NYSE. “The aim of the NYSE Tech Council is simple: convene conversations among market leaders to help our listed companies make the best possible use of innovations in AI, cyber and other key areas.”
The NYSE and ICE have a long history of deploying cutting-edge technology to address market inefficiencies and provide transparency. In October 2023, the NYSE completed a multi-year upgrade of the technology that supports trading activity on its equity and options markets. NYSE Pillar, one of the industry’s most deterministic technology platforms, now powers every exchange the NYSE operates as well as critical U.S. equity market-data infrastructure. NYSE Pillar has set a new standard in performance, despite unparalleled growth in demand and electronic message rates.
FIA has responded to a discussion paper released by international standard setters that sets out eight “effective practices” for streamlining variation margin in centrally cleared markets. The discussion paper addresses the need for greater transparency and understanding of margin practices at central counterparties, particularly in light of recent episodes of market volatility triggered by the COVID crisis and Russia’s invasion of Ukraine.
Central counterparties generally make calls for variation margin at the end of the day, but they can make intraday VM calls and often do so when markets are volatile. The members of the clearinghouses must fund the calls immediately, and during periods of market volatility, these calls can be very large.
For this reason, FIA has urged CCPs to provide more transparency and predictability into intraday margin calls. FIA recognizes that CCPs need the ability to call additional margin when markets become more volatile, but providing more transparency and predictability into their margin practices would allow their members to prepare more effectively for these calls, thereby reducing sudden demands for liquidity that can contribute to market instability.
This issue drew the attention of global regulators when market volatility associated with the COVID crisis triggered a “dash for cash” by financial market participants that needed to close out positions to meet their liquidity needs. The Basel Committee on Banking Supervision, the Committee on Payments and Market Infrastructures, and the International Organization of Securities Commissions published a general review of margin practices in 2022, and in April 2024 CPMI and IOSCO published a discussion paper focused specifically on streamlining variation margin.
Jaqueline Mesa
In its response, FIA said it generally supports the effective practices outlined by CPMI and IOSCO, with specific recommendations aimed at further refining intraday margin processes and collateral management within CCPs. The response notes, however, that the practices are not enforceable, and urges international standard setters to consider establishing principles and/or standards for variation margin and intraday margin practices.
“We generally support these effective practices,” Jaqueline Mesa, FIA’s chief operating officer and senior vice president of global policy, said in the response.
“They promote transparency and predictability for market participants, timely consideration of sourcing liquidity, optimization of netting benefits and the eligibility of non-cash collateral. However, we believe that binding standards or principles could be established for variation margin and intraday margin practices.”
Specific recommendations highlighted by FIA in the letter include:
Scheduled and Unscheduled Intraday Margin Calls: FIA supports transparent and clearly defined scheduled intraday margin calls, made consistently and at reasonable hours, to enhance predictability for market participants. Unscheduled calls should be reserved for extreme market conditions or significant exposures, with clear triggers and thresholds communicated to all participants.
Transparency Requirements: FIA stresses the importance of comprehensive transparency in CCP margin practices, including detailed breakdowns of calculations, netting arrangements, and availability of excess collateral. This transparency is crucial for participants to understand and manage their intraday margin obligations effectively.
Establishment of Binding Standards: FIA recommends establishing binding standards or principles for VM and intraday margin practices to ensure consistency and enforceability across CCPs.
Pass-through VM Model: FIA encourages the exploration of the pass-through VM model to enhance liquidity and risk management efficiency, provided that challenges related to fair valuation and liquidity sourcing are carefully considered.
Collateral Management: FIA advocates for flexibility in collateral use, allowing non-cash collateral to cover intraday margin obligations and enabling the mobility of excess collateral across CCPs to optimize liquidity management.
FIA supports transparency in the derivatives clearing community and has published several papers over the past few years recommending CCP risk management best practices, including enhancing transparency. Most relevant are the recommendations and policy options published in a report from October 2020, Revisiting Procyclicality: The Impact of the COVID Crisis on CCP Margin Requirements, which covers intraday margin among other topics.
Kevin Cronin, who retired from Invesco at the end of 2023, won Lifetime Achievement at the 2024 Markets Choice Awards.
Markets Media caught up with the long-time buy side trader to learn more.
Kevin Cronin (Photo courtesy of Kevin Cronin)
Please tell us about yourself and your career.
I started in this business after getting an MBA in finance and accounting from Vanderbilt University, at which time I joined Barnett Banks Trust Company as an analyst. As it turns out, due to some unforeseen events, there was an urgent need for a trader, and management decided that since I had a series 7 and 63, that somehow, I made the most sense to become a part-time trader. So I started my career in trading as a part-time trader.
I knew early on, after that somewhat odd introduction to trading, that trading was much more suited to my interests, skills and personality. As the old saying goes, analysts and PMs are in the storage business and traders are in the moving business – and the moving business was just beginning to emerge as an important component of the investment process. It was just more interesting to me.
From there I went to TrustCo Capital Management (part of Trust Company Bank in Atlanta) to be a full-time equity trader and then on to First Union, in Charlotte, as a trader. After a few years, I became Head of Equity Trading at First Union and also took over as the Lead PM on an S&P500 enhanced index fund. As fate would have it, I went to an National Organization of Investment Professionals meeting soon after that and was introduced to Ronnie Stein, who was Head of Trading for AIM in Houston. Ronnie was intrigued that I was among the youngest people in NOIP at the time, and he wanted to figure out why that was. After the meeting we kept in touch until Ronnie decided it was time to hire me – so I went to AIM to be Head of Domestic Equity Trading in March of 1997 – and so began my journey with Invesco. As I recently wrote in a LinkedIn post, I characterize my time at Invesco as three distinct careers: as an Equity Trader, as Global Head of Trading, and most recently as Head of Equity Investments. I could write a book on each, but for now suffice to say that I have had a very interesting and diverse set of opportunities and experiences over the years, and I wouldn’t change any of it. (Well, maybe a few things…)
Why did you decide to retire?
I had an incredible run at Invesco and am so fortunate to have worked with so many great colleagues and to have had so many exceptional opportunities and experiences while I was there. But 27 years is a long time with the same firm, and I came to the realization that it was time for me to try something different – maybe very different – which inevitably meant that I would have to leave Invesco to pursue that. Obviously, I wanted to give Invesco plenty of time to ensure that we transitioned my responsibilities in a thoughtful and responsible way. My CIOs and I had done a considerable amount of work over the past five years to optimize our equity investment platform – so I knew that the timing would be right to bring in the next generation of investment leadership. Fortunately for me, our CEO, Marty Flanagan, and his senior team were very understanding and supportive of my decision, which enabled us to put in place a thoughtful and effective transition plan. I left Invesco very confident in our Equity CIOs and the equity investment platform, and of course I wish nothing but the best for my Invesco colleagues, our clients and the firm.
Kevin Cronin speaks at the Markets Choice Awards in New York on Thursday, May 9, 2024. (Photo credit: Chris Herder Photography)
How did trading evolve over the course of your career?
Well, the short answer is that trading changed dramatically since I did my first trade all those years ago. When I first started trading, there was no OMS – all of our tickets were handwritten (which made partial trades a real treat as we had to do allocations across all accounts manually on new trade tickets), and the only technology we had was an old “DOT” machine, a Quotron (with an alphabetical keyboard – not QWERTY) and a shared Bloomberg terminal. In those days, the Bloomberg terminal was just a proprietary box provided by Bloomberg with amber text and a very odd keyboard. We had pink sheets, an S&P symbol guide and phones – that was pretty much the arsenal at the time. Trading was in 1/8 increments (although NASDAQ might has well have been 1/4’s) and a very busy day saw around 200 million shares trade hands on the “Big Board”.
There were also quite a few more brokers back then – many of which are gone or merged away – firms like Kidder Peabody, Drexel Burnham, Smith Barney, EF Hutton, Troster, etc. Broker research was important – and getting the “first call” was very valuable. The NYSE was a not-for-profit entity, and their market share was well above 80%. In those days, when we wanted to trade an odd lot, we had to pay a mark-up known as the odd lot differential, and “fast” trades happened in minutes – many, many minutes in most cases. Probably the most notable difference was the incessant phone ringing – and being almost entirely dependent on human interaction to complete a trade. Trade settlement was T+5 – and average pricing was just starting to take hold.
So, a pretty stark contrast to today’s trading environment.
How did technology change the trading landscape?
Technology has had a profound impact on the financial services industry – but nowhere has the magnitude of that impact been felt more dramatically than in trading. Honestly, there were so many inefficiencies in the trading markets, and the trading vocation 20 years ago – from workflow process inefficiencies to very limited electronic trading tools – that in many respects made the revolution in technology in trading and markets entirely sensible if not inevitable. Today, armed with sophisticated OMS and EMS tools, traders have so much more control over their orders and a much more diverse array of ways they can interact in the marketplace – from smart order routers to sophisticated generative AI powered algorithms to find liquidity in increments of time not contemplated 20 years ago – or maybe ever.
But of course, it is much more than that – exchanges have become bastions of trading technology and of competition amongst all kinds of technology-enabled trading. Trading markets, while not perfect, have benefited tremendously from technology. Today markets are much more competitive, efficient and resilient – thanks in large measure to the advancement of trading technologies. I would also note that regulation of markets has been significantly enhanced by powerful technology-enabled oversight tools to more effectively surveill the fairness and integrity of markets.
If you had to choose between trading now or back then, which would you choose?
Equity markets have changed pretty dramatically over the years, and for the most part, this change has been very good for market participants – including long-term investors. That said, for me, it would have to be “back then” – because I believe the trader’s role was much more important within the context of the investment process back then – certainly on the equity side of things. I also believe that the value the trader brought to the investment process was much more discernible and attributable to a trader’s specific skill and decision-making abilities.
This isn’t to suggest for a moment that I don’t think traders add value today – they quite clearly do – but it is much more difficult to discern. Of course, the other primary reason why I would choose the old days versus today – comes down to the criticality of relationships back then and the skill required to optimize how the system worked. We spent countless hours getting to know the layout of the floor, the specialist firms and of course the specialists. We had an array of stealthy floor brokers to represent our orders when needed, and we had excellent sales coverage and full access to the position traders and market maker’s capital. Strong negotiating skills, optimally understanding the supply and demand dynamic, knowing how to balance the risk-reward dynamic of making a call or having the temerity to trade a large block at a single price – these were the skills that were on display for nearly every trade.
There were very few days that I left the office unaware of whether or not I had a good trading day. Trading was, as I have said many times before, at the same time more complex and more simplistic than trading today. For me it was stressful but exhilarating.
Marc Wyatt of T. Rowe Price and Kevin Cronin at the Markets Choice Awards in New York on Thursday, May 9, 2024. (Photo credit: Chris Herder Photography)
Is there a “best trade ever” that you remember?
I was very fortunate to have been part of some extraordinary trades over my career — in fact, the older I get, the longer that list of great trades grows in my mind!
Kidding aside, I would seriously struggle to pick just one – and that isn’t because I can’t remember – I remember most of my most significant trades. In fact, one of the benefits of having been in this business as long as I have, is that whenever I would get a visit from a former sales trader, position trader or market maker from Goldman, Merrill, Citi, Morgan Stanley, CSFB, JPM, etc. over the years, I would always end up hearing a story about how I blew up their P&L back in the day on a particular trade I got them involved in. That usually was a pretty good indicator of a very good trade. Maybe one of these brokers would be better able to tell you what my best trade was. Of course, I don’t remember hearing too many stories where the broker made a lot of money…
What else did you find rewarding about your career, other than just trading?
My father was a cancer specialist, so I often and literally grappled with the fact that the career path I had chosen wasn’t curing cancer. That said, there is no question that the work of helping people achieve their investment objectives – of saving to buy a house or to send their kids to college or even for their own retirement – is indeed a noble vocation. So I feel very fortunate to have been in a career that was advancing our clients’ quality of life.
Within the context of that, and beyond my specific roles at Invesco, I really did enjoy the work I did with regulators, industry participants and even Congress over the years, to advance the cause of market structure fairness and integrity for long-term investors. I was lucky enough to be invited to many of the most influential roundtables, congressional testimonies, and industry trade group conferences on the topic of equity market structure – to represent the interests of long-term investors. From NMS to speed bumps, market data and nearly every issue in between, I had the opportunity to at least be part of the discussion, if not to help shape what the structure should be. Such an amazing opportunity – to represent our investors and really all long-term investors in these critical conversations. While I am at it, a big thank you to the SEC, the exchanges, industry groups and other industry participants for including me in so many of these conversations over the years.
What do you do outside work?
I really like to travel – my wife and I spend a lot of time travelling all over the world. I have a son and daughter who are now out of the house and into the working world, and I enjoy seeing them as much as possible. Also, about 10 years ago I started playing guitar – I’m hopeful that with a little more practice, soon I will sound like I have been playing for two years!
Kim and Kevin Cronin at the Markets Choice Awards in New York on Thursday, May 9, 2024. (Photo credit: Chris Herder Photography)
What do you think about trading as a career and what advice would you offer new and aspiring traders?
When I started my trading career, I don’t think many people viewed trading – especially on the buy side – as a viable long-term career. In fact, when I pursued the CFA designation many years ago, there was no choice for a trader on the admissions form, so I had to write “other” and then I had to explain/justify how trading would provide the necessary work experience required to fulfill the CFA requirements beyond passing the exams.
My point is that the vocation of trading was not really thought about as a valuable component of the investment process – nor was it viewed as a great training ground for long-term investment careers. That paradigm of thought has changed dramatically over the years in the equity world and most certainly beyond – as a trading career has become fertile ground for launching wildly successful careers.
Don’t get me wrong, I’m not taking a victory lap here trying to take credit, but I do think that my career has served as a very good case study for those trying to understand how a trading career can develop and where it can lead. I started in this business as a part-time trader and ended my career at Invesco as Head of Equity Investments with peak assets of over $310 billion – not bad for a kid from Kentucky.
My advice to the next generation is simple: the best investment you will ever make is the continuous investment in you! Keep learning, stay ahead of the curve, embrace technology and innovation, and don’t be complacent. There will always be challenging days, but fear not, because there will always be great opportunities for smart, hard-working, and forward-thinking people.
What’s next for you?
I have had some very interesting conversations about my future with a variety of industry and non-industry participants. For now, suffice to say that whatever I choose to do, I want to have fun, be a leader, and do work that is impactful, innovative, fulfilling and relevant. In other words, something that is a fitting second act to a pretty extraordinary first act!
By Danny Green, Head of International Post-Trade Solutions, Broadridge
T+1 offers a golden opportunity to bolster post-trade processing capabilities to achieve a long-term competitive advantage. Forward-thinking firms can now use T+1 compliance as a driver for real operational efficiency gains. But there remains much to be done.
Danny Green
As we should all be aware, the Securities and Exchange Commission (SEC) has adopted the rule to shorten the settlement cycle to T+1, effective from 28 May 2024 for most US securities transactions that settle through the Depository Trust & Clearing Corporation (DTCC).
Given the interconnectivity of North American markets, this decision is in synch with the Canadian Capital Markets Association (CCMA), which will transition to T+1 a day earlier, on Monday 27 May 2024.
The shift to a T+1 trade settlement cycle represents a critical step for the financial services sector at a time when markets are changing and accelerating at a fast pace.
Shortening the settlement cycle will reduce the depository collateral requirements that put Robinhood and global markets under substantial pressure in the GameStop episode, and will provide significant relief to market participants in periods of heightened volatility. It will also generate other risk reductions, as well as free up capital for high-priority business needs and increase overall operational efficiency.
Other benefits will include lower counterparty risk, increased market efficiency, decreased margin deposits for broker-dealers, and faster access to funds.
I believe it’s crucial we simplify the trade life cycle so we are no longer solving problems 24 hours later. Instead, we should be solving them in the trade support areas on trade date, and reducing the number of failed trades.
T+1 now requires considered engagement across the global industry. As well as the benefits, the compression of the settlement cycle to 24 hours will create significant challenges and potential new costs for individual firms.
The implications from the move will extend far beyond operations and technology, affecting funding practices, revenues, and balance sheets.
Ripples felt across the global landscape
The transition to T+1 has become a global concern. With the US on track for T+1, other markets are feeling increased pressure to follow suit. The UK’s Accelerated Settlement Taskforce, for example, has recommended a two-phased approach1 to shortening the settlement cycle, beginning with operational changes from 2025 and full transition by the end of 2027.
Fund managers have also been urging European regulators to mirror the move to T+1, with the Financial Times reporting many are warning of a “major and serious risk”2 to the continent’s capital markets if regulators don’t copy the US and Canada and cut settlement cycles to one day.
The European Securities and Markets Authority (ESMA) launched a call for evidence last year on whether European Union (EU) markets should also move to T+1. ESMA is now busy assessing the responses, and is set to publish its final report in January 2025.3
Gary Gensler, chair of the SEC, accentuated matters at an event in Brussels earlier this year, saying European regulators and market participants must now consider narrowing the window to finalise deals to a single day. His comments came as Mairead McGuinness, the European Commissioner for Financial Stability, Financial Services and Capital Markets Union said it was a question of “when and how”4 the bloc shifts securities settlements to a single day.
ICI Global’s Michael Pedroni5 is amongst industry voices saying that EU policymakers should commit to move to T+1 settlement and then communicate a clear path to implementation.
The shift to T+1 in Canada and the US will also have a profound impact on investors and their service providers in Asia. Faced with time differences of up to 14 hours, Asian investors will have no choice but to complete all of their processing for North American trades on trade-date – so that all trades are fully funded, matched, and ready to settle before the end of the Asian trading day.
This acceleration of processing will have a significant impact across the entire front-, middle- and back-office operations in Asia, and therefore demands significant preparation and change. However, 6 as well as affecting all geographical markets, the move to T+1 touches on all market participants.
Sell-side firms now need to understand the behavioural, structural, operational, and technological change costs associated with executing a T+1 strategy. In a T+1 setting, the previous strategy of simply adding more resources to perform manual functions will become problematic. Firms will not have the time needed to execute essential functions manually, and will become far more reliant on technology to meet deadlines and demands.
And if they have not done so already, buy-side firms must quickly complete a detailed impact assessment on the implications of T+1 across the trade cycle and identify the changes they need to make to their technology, operations, and control processes to future-proof their business. With the go-live date approaching fast, brokers and buy-side organisations are hurrying to complete a daunting schedule of planning, testing, and implementation.
Ultimately, there is no universal playbook on how to assemble new processes and technologies into an infrastructure, and a governance structure, for next-day settlement.
Every firm must chart its own unique course, identifying the necessary changes for current procedures and finding effective solutions.
Here are some suggestions that they may find useful as they look to tackle this challenging task.
Sharpening up the sell-side
Brokers rely on their clients for critical data throughout the trade processing and settlement cycle.
Under the new T+1 rules, brokers will need this data much earlier. The sell-side will be required to complete the affirmations, confirmations, and allocations process on the day of trade. In addition to ambitious upgrades of key internal functions, hitting those deadlines will require timely inputs from clients. As a result, a core part of preparing sell-side firms for the switch to T+1 will be ensuring that buy-side partners are equipped to keep pace with the new, accelerated demands.
Planning should have started long ago with a comprehensive mapping of their trade cycle, and a detailed assessment of how – and where – the move to T+1 will impact trade processing and settlement at each point in the cycle.
Effectively analysing those findings will then allow firms to flag adjustments they will have to make to technology, operations and control processes, and internal behaviours. These will not be short lists.
The shift to T+1 therefore requires significant investments of both time and resources. To lay the foundations for a successful outcome and maximise the returns on those investments, I would recommend that sell-side firms follow these five guiding principles when developing their T+1 transition plans.
Use T+1 as a catalyst for strategic automation projects
If there was ever a catalyst for automation, T+1 is it.
Manual interventions that seem innocuous now will emerge as significant obstacles in a T+1 environment, causing compounding disruptions and delays. Some manual functions catalogued in the planning phase for T+1 transition will be relatively quick and easy to address—with the right solutions.
Third-party vendors can now provide robotic process automation (RPA) applications and other tools that can be used to automate routine tasks relatively quickly, inexpensively, and without interfering in other processes and functions.
T+1 should really provide the motivation needed to get these “low-hanging” automation projects completed now.
Sell-side operations and technology teams should use the looming deadlines for T+1 transition to unlock funding for these valuable projects. Think about it like basic maintenance for your car. A full tune-up can seem costly up front but remediating minor issues now will avoid potentially more difficult issues later on.
Set your sights on Straight-Through Processing (STP)
T+1 remediation efforts should never be viewed simply as one-off projects.
Rather, all alterations required for T+1 should serve as steps in the firm’s broader and more strategic journey to STP.
It’s much smarter, and more cost effective, to direct money and time to bigger capital improvements that will enhance the organisation’s overall efficiency.
Many banks and brokers still run on legacy systems that have been pieced together through multiple mergers and business expansions over the course of years – or even decades. Most firms are in the midst of digital transformation initiatives designed to break down siloed systems and eliminate fragmentation. One of the primary goals of these projects is to facilitate the free flow of timely and reliable data across organisations.
Over the long term, sound data management and governance capabilities will serve as the foundation of automated STP platforms that eliminate, or at least dramatically reduce, the need for human intervention.
More immediately, consistent, reliable, and timely data are basic requirements for the RPA tools, AI applications, and other tools that firms will need to meet T+1 deadlines. For that reason, firms that plan well should be able to use T+1 preparedness as a springboard toward more automated trade and settlement processes and, ultimately, to STP.
Build incrementally with a modular architecture
Digital transformation strategies can often span up to five years. With T+1 imminent, brokers will have to prioritise very carefully.
As they do so, they should take advantage of important technological innovations such as cloud computing, APIs, and software-as-a-service (SaaS). Together, these tools make it easier for firms to build next-generation technology platforms incrementally.
Today’s organisations can construct their technology infrastructure using a “modular” design. Using this approach, firms can select the right components for each function and integrate them into their broader architecture without necessarily interrupting or revamping adjacent functions. With this considered strategy, firms can gradually assemble individual solutions into a comprehensive, automated platform, provided they start with the right plans and the right technology partners.
Get a real-time view of inventories
The move to T+1 represents a real paradigm shift for the sell-side.
From this point on, firms will have little to no time for manual reconciliations of internal positions. In a T+1 environment, firms will require something close to a real-time view of cashflows and inventories across the entire organisation.
Unfortunately, most firms do not have a holistic vision of their inventories—at least not in real time. Inventories are typically fragmented by line of business and geographies.
Positions are often held in multiple DTCC accounts. This system is generally sufficient in a T+2 environment, but it will be challenged in T+1. For example, in the securities lending business, brokers currently have until 3pm* on T+1 to recall securities from borrowers. In the faster settlement cycle, that deadline will be advanced to 11:59pm on day of trade, or even earlier.
In many cases, that won’t leave enough time for the broker to receive notice that the original holder of the security is selling, send out a recall to the borrower, and receive and deliver the security. Missing that deadline would most likely result in a failed trade and the introduction of market risk – not to mention the knock-on impact to other parts of the post-trade ecosystem, such as corporate actions processing.
As a result, brokers will have to become much more efficient in netting out positions across their entire inventories and organisations. To do so, they will need a consolidated view of positions across asset classes, geographies, and business lines. It won’t be enough to generate that view at the end of the batch cycle—it will have to be available in real time.
Upgrading to that real-time, consolidated view will create real benefits. New real-time transparency and predictive analytics will allow firms to project availability and demand, and optimise inventories for lending and borrowing. The same capabilities will create similar opportunities to enhance efficiencies in other businesses.
Achieving this goal is much less difficult than it would have been just a few years ago. Today, fintechs are offering comprehensive systems that help even the biggest sell-side firms to monitor and manage inventories in real time.
Find the weak links in your client lists
As mentioned earlier, sell-side firms will have to rely on their clients to help hit new deadlines imposed by T+1.
In some cases, that shouldn’t be a problem. Some buy-side firms, especially large hedge funds and asset management complexes, match their sell-side counterparts in terms of technology stack and automation. These firms should be well prepared for the switch. However, other buy-side firms are still using many manual processes, with some firms still emailing allocations to their brokers.
As they create the policies, procedures, and working agreements that will govern trade processing and settlement in the new trade cycle, sell-side firms should be carefully reviewing their client lists, assessing the capabilities and preparedness of individual clients, and flagging the firms most likely to cause problems.
Sell-side firms should be reaching out to their slowest and most manual clients to help them head off issues that could disrupt the settlement process in live T+1 trading.
This effort can actually serve multiple purposes. Most importantly, it can help ensure that both sides are prepared for the new deadlines imposed by next-day settlement. However, this outreach can also be positioned as an educational and advisory service to clients, creating new opportunities for positive interactions with the buy-side, and potentially strengthening client relationships.
Bolstering the buy-side
It’s important to be aware that the transition to T+1 will be unlike previous settlement compressions in that most of the lessons from past conversions simply do not apply this time around.
Since the 1970s, the buy-side has kept pace with the gradual shortening of the settlement cycle through a mix of innovation and increased staffing. But the move to T+1 will differ in two important ways.
Firstly, in a T+1 environment, buy-side firms will simply not have the time needed to execute essential functions manually. As they transition to T+1, firms will become far more reliant on technology to meet new deadlines and new demands.
And secondly, innovation has now provided a host of new solutions, including RPA, AI and enhanced data exchange, that can help buy-side firms to better automate processes. Much of this technology did not exist – or was not widely available – during the T+2 transition.
With those two important facts in mind, buy-side firms should be working hard to assess the implications of T+1 across the trade cycle and to identify the necessary adjustments they will have to make. To be properly prepared, senior management should make T+1 impact assessments and strategic planning a top priority.
Meeting the demands of next-day settlement will require countless changes to the systems and procedures used in key areas such as trade matching and allocations, settlements, securities lending, and funding. This transformation will be highly complex due to the sheer number of points at which the shortening cycle will impact operations and settlement processes. As a result, planning for this change must take place at an extremely granular level.
The good news is that in every one of these areas, technology is providing new solutions that will help buy-side organisations bridge gaps and make needed adjustments. For this reason, a key part of the T+1 planning process will be finding technology partners with the tools that best fit the organisation’s unique needs and work cycles. And as they plan their strategies, I suggest firms prioritise the following features and capabilities.
Real-time transparency
One of the most important and challenging steps in transitioning to a shortened settlement cycle will be establishing processes that keep buy-side firms updated on the real-time status of trades and flag any potential inconsistencies at the earliest possible moment.
Next-day settlement will leave little time for the resolution of breaks and fails, or to manage risks in the corporate actions process. Currently, asset managers don’t know whether a trade has settled until they are informed by their prime broker or custodian bank. Often, that confirmation doesn’t arrive until T+2. In the meantime, the prime broker or custodian has been instructed to transfer funds to the trade counterparty, starting the clock on interest and fees charged to the asset manager. Failed trades, of course, trigger additional charges.
To be truly ready for T+1, buy-side firms will have to implement digital solutions that provide real-time transparency in the following areas:
SSI: A large proportion of trade breaks originate in the default standing settlement instructions (SSI) established by individual market participants for payment and delivery of securities. Identifying inconsistencies in these instructions at the start of the trade process will give buy-side firms the opportunity to resolve problems immediately. That will achieve two important goals.
Firstly, it will eliminate time wasted waiting for custodian banks and brokers to report an issue, potentially saving as many as 24 hours; and secondly, it will dramatically reduce the number of trade breaks that need to be addressed and resolved after the fact.
Parallel processes: Buy-side firms will have to create new procedures for delivering trade details to prime brokers and coordinating information amongst the asset manager, executing brokers, and prime brokers.
Currently, buy-side firms deliver trade data to executing brokers and prime brokers separately. The trade and allocation details are sent to the prime broker before the trades are matched with the executing broker. This is a timing problem which causes issues on T+1 if there are any trade discrepancies between the asset manager and the executing broker. When the asset manager and executing broker identify and resolve an exception, the prime broker is out of the loop. That disconnect introduces timing and market risk, not to mention a delay that often stretches for a full day. Obviously, that process won’t suffice in a T+1 environment.
Buy-side firms will have to implement solutions that supply prime brokers with trade details in real time as soon as trades are matched between the asset manager and the executing broker, or send the trade details to the prime brokers after the trades are matched.
Automated follow-up
Regardless of when the buy-side firm finds out about a potential problem, it will be a major challenge to resolve any issue manually in a T+1 environment.
Upgraded settlement systems will have to include automated processes that identify potential problems and automatically initiate a resolution process amongst all parties involved in the trade.
Those capabilities are already coming onto the market. For example, there are solutions with features that automatically generate and send emails to the executing broker with CCs to the relevant support desk if the buy-side firm has not received required notifications from the broker within a predefined period of time. It’s worth firms taking the time to check out such solutions, and work out which are the best fit.
Process automation
As touched on earlier in the article, the transition to next-day settlement represents an important step in the industry’s ongoing efforts to achieve 100% STP. Process automation initiatives required for T+1 will span many of the core operational and settlement functions that make up the trade lifecycle, including operations trade processing, operations settlement processing, corporate actions, fails management, reference data, and others.
Some buy-side firms already have a system in place that can streamline many of these functions.
That situation is manageable in the current T+2 environment, where firms have a full 48 hours to process exceptions and resolve problems.
Under T+1, firms will officially have until 9pm on the day of trade to fix incorrect matches or disaffirm trades, but the real deadline will be much earlier. Remember, your own operations teams have to go home at some point and so do your brokers. To meet the new deadlines, it is likely that trades will need to be matched by about 7pm.
Laying a future-proof foundation
Every decision made in the transition to T+1 should be made with an eye toward the ultimate move to T+0.
Compressing the cycle to next-day settlement will require a significant investment of resources and time.
Firms will maximise the returns on those investments by using the move to T+1 as an opportunity to put in place a digital, automated, and flexible architecture capable of someday serving as the foundation of a T+0 settlement process.
Thinking about the critical next steps
On the subject of T+0, it’s perhaps inevitable that as we approach the switch to T+1 settlement, many in the market are already trying to look further ahead to potential same day settlement, in order to avoid future lengthy implementation delays.
However, many believe it’s currently not a viable reality. Recent research by Coalition Greenwich8, for example, found the feasibility of shortening the cycle even further “would represent a more radical transformation with far-reaching implications and potential unintended consequences” and demands careful consideration before empirical moves can be made.
I believe the industry will need roughly another five years after the start of T+1 to be truly ready for the ultimate move to T+0. In that timeframe, regulators and market participants will have to come together to tackle three key issues:
A consensus on what T+0 actually means. Should the industry adopt an instantaneous real-time gross trade settlement model, or T+0 end-of-day net settlement?
Construct a practical framework. The technology infrastructure required to achieve T+0 cannot be so cost prohibitive that smaller market participants can no longer be competitive.
Create benefits for end investors. T+0 needs to deliver net benefits to the end investor, either through price improvement or liquidity.
Ultimately, when it comes to T+1, and in the future T+0, collaboration is going to be absolutely crucial.
It’s important that firms don’t try to go it alone. Every day, vendors are rolling out new and transformative solutions that can help firms to address the specific challenges that the T+1 transition poses to their organisations, whilst taking advantage of the new benefits it unlocks.
Such solutions are now more widely available from a growing number of fintech providers that can help the industry to address inefficiencies, embedding operational excellence as a core competency.
We have a genuine opportunity to future-proof our industry. Let’s make sure we take it together.
*Editor note: All times referenced in this piece are Eastern, or generally five hours behind London time.
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1 – “UK Taskforce recommends T+1 settlement by the end of 2027 in two-phase approach”, The Trade, 28 March 2024; 2- “Fund managers urge European regulators to mirror US move to T+1”, Financial Times, 15 Jan 2024; 3- “UK looks to harmonise T+1 move with Europe”, ETF Stream, 2 April 2024; 4 – “SEC’s Gensler calls for shorter settlement times in currency markets”, Financial Times, 25 Jan 2024; 5- “ICI and ICI Global Welcome EU Consideration of T+1 Settlement Cycle,” ICI Global, 15 Dec 2023; 6- “T+1 for Asian Brokers – Risk and Rewards” Broadridge; 7- “Time is Money. Time is Risk” Prepared Remarks before the European Commission, ” Gary Gensler, 25 Jan 2024 as published on the website of the US Securities and Exchange Commission; 8 “Top Market Structure Trends to Watch in 2024”, Coalition Greenwich, 3 January 2024
CLS, a financial market infrastructure group delivering settlement, processing and data solutions, has announced that Barclays Bank has officially gone live on its Cross Currency Swaps (CCS) service.
Michael Pollak, Head of Cross Currency Trading, Barclays Bank, said: “As markets continue to navigate an uncertain period, being able to mitigate FX settlement risk via CLS’s CCS service is a vital part of our risk management practices. Through multilateral netting, we can also optimize our liquidity, reduce our funding requirements and remove friction from the market’s infrastructure. We look forward to the continued benefits the service will bring to our operations and the wider industry.”
Michael Pollak
The CCS service – an extension of CLS’s unique payment-versus-payment (PvP) settlement service, CLSSettlement – mitigates settlement risk for CCS transactions. By integrating CCS flows into CLSSettlement, the service allows for multilateral netting against all other FX transactions, providing substantial liquidity optimization benefits as well as reducing daily funding requirements for clients.
As public policy efforts to mitigate settlement risk have increased, CLS’s CCS service has seen a notable rise in activity. Values of CCS submitted to CLSSettlement are up 48% year-on-year in 2023, highlighting the industry’s support for the service.
Lisa Danino-Lewis, Chief Growth Officer at CLS, said: “Barclays Bank going live on our CCS service is a positive step in our continual work toward making the global FX market more resilient and efficient. The adoption of our CCS service by Barclays, one of the world’s premier banking institutions, demonstrates the value and trust placed in our risk mitigation and liquidity management solutions by the industry. The growing number of institutions, as well as growing volumes on the platform, underlines the industry’s commitment towards minimizing settlement risk in the FX market.”
The CCS service supports FX market participants’ adherence to Principle 35 of the FX Global Code.1 It also helps market participants respond to recent public policy efforts to mitigate settlement risk, such as the European Central Bank’s new guidance on how banks should mitigate FX settlement risk and the Financial Stability Board’s Roadmap to Enhance Cross-Border Payments.
Less Than One Month To T+1 trading – Are Firms Prepared?
By Dan Miller, Senior Managing Director, Outsourced Middle Office Services at IQ-EQ
With the US adopting a single-day settlement trading framework at the end of May, many managers are scrambling to ensure their trading architecture can handle a one-day settlement process. But why is it so difficult?
It’s been seven years since the US shortened its settlement cycle to two days, but US asset managers are still struggling with the idea that by the end of this month, they will be required to settle trades in a single day.
The shift to T+1 has been in the works for quite some time. Historically, we’ve seen a variety of settlement times, from T+2 and T+3 all the way to T+5, to settle securities transactions. However, a single-day settlement requires a variety of operational changes that make this new timeline uniquely challenging for many asset managers.
In February 2023, the Securities and Exchange Commission announced the deadline to shorten the US settlement cycle to one business day after the trade date, which would go into effect on May 28, 2024. This gave asset managers and financial institutions a little over a year to reconsider their internal infrastructure and technology to allow for single-day securities settlement, a much more complex ask than it may seem.
The operational hurdles
To understand why the shift to T+1 requires managers to reconsider their tech stacks, it’s important to recognize exactly how a trade is settled and what it entails.
When you buy a security, such as a stock or bond, the brokerage firm inputs the order on the market and the trade is executed. Under a single-day cycle, that order is settled the next day. Even in a T+1 world, trades are not settled instantaneously. By the time the trade is fulfilled, stock prices may differ from the purchase price. In a volatile market, these prices may fluctuate significantly, leading to massive amounts of capital hanging in settlement limbo. The move to T+1 cuts that current limbo-time in half.
However, this condensed settlement cycle also brings with it a variety of challenges for managers to meet the new regulatory requirements.
One significant barrier is the global workings of the market. For managers trading US securities, they may be required to hold US operational hours in order to support settlements on a T+1 scale, whether that’s hiring in-house employees who hold conventional US hours, or outsourcing to a provider in the US that operates on local US hours.
A regulatory shift like this brings with it a headache of operational changes. The complexity of the T+1 cycle also differs based on the manager, as well as their specifics when it comes to how often they trade, who they are trading with, and how they’re trading. Those with more partners, such as multiple prime brokers or custodians, will have more infrastructure changes needed to support the condensed trading timeline.
In recent years, the shift toward buying tech stacks from vendors has increased as allocators pressure to lower fees continues to impact margins and firms are no longer comfortable with significant investments in back-office technology that will inevitably need to be amended to meet future operational changes. Whether shops decide to buy or build, the thought process around designing trading infrastructure should be similar to buying kids clothes, you buy a size up and the kids grow into them. That’s how managers need to be planning for the T+1 adoption. While it’s currently a single-day settlement we’re preparing for, real-time trading is a very real possibility on the horizon.
How Europe can learn from the US
As Europe is potentially a full 18 months (or more) behind the US when it comes to T+1, there are quite a few managers across the pond who will be able to learn from US-based managers once the May 28 implementation deadline occurs. However, there are also key differences between the US and European markets that will create additional barriers for European managers.
The US has a relatively consolidated exchange landscape compared to Europe. The fragmented nature of various jurisdictions and clearing houses in Europe means there is a much wider gap when it comes to consolidating for a single-day settlement cycle.
The cost of compliance
Increased regulation, while imperative to a functioning economy, also brings with it added costs, along with the benefits of transparency for investors. The shift to single-day settlement has a host of costs, including the technology and infrastructure to support the necessary reporting and trade execution. However, the importance of settling a trade within one day is not only important for the funds to meet their regulatory requirements, but also in the best interest of the limited partners (LPs) who are providing the capital for the funds, because at the end of the day it’s their money that’s being traded on the market. In many cases, expenses associated with T+1 trading will be allocated to the fund vehicle for the LP to ultimately pick up the cost, instead of the investment manager taking the full brunt of the expense.
What next?
Only after the T+1 trading settlement cycle goes into effect will we see if managers have properly prepared themselves to handle a single-day settlement timeline. This is, in some way, a test run for the future of instantaneous, real-time trading, or T+0. While back in 2017 amid the shift to T+2, real-
time settlement felt like a far-off alternate reality, it’s clear that the market and technology have advanced enough to make real-time settlement no longer a dream, but a feasible option in the near future. And something that occurs in the Digital Asset space, every day.