Market Participants Eye T+1 Settlement

Anna Lyudvig

Buy and sell-side firms are reviewing their current post-trade processing to assess the demands that will create and process areas that may fail under the stress of the shortened timeframes, according to David Pearson, Product Owner- Middle Office at Torstone Technology.

“All attention is now on the potential move to T+1,” he told Traders Magazine.

The Depository Trust & Clearing Corporation (DTCC) is pushing for the shortening of the US settlement cycle to T+1 by 2023.

David Pearson

“The benefits of the move are clear – reduced risk exposure and reduced capital requirements, which could drive some firms to self-clear. But the biggest concern is not to have enough time to make changes to business processes and existing technology platforms that will need upgrading or replacing,” Pearson said. 

“For many firms, it will be the right time to decide to replace their legacy systems due to their increased operational risk in an accelerated T+1 cycle,” he added.

According to a recent survey by Torstone Technology in collaboration with GreySpark Partners, while a T+1 settlement cycle would reduce much of the settlement risk, it would introduce some weighty operational challenges for banks and brokers.

“There will be operational challenges. T+1 will stress the technology and processes for all. Manual processes where people get involved in solving unusual trade situations or client requirements remain the bugbear for the industry,” Pearson said. 

“For T+1 to work each firm has to target same-day confirmation and submission rates as close to 100% as possible. Systems will have to handle their workflows on a real-time event-driven basis, with automation wherever possible,” he said.

While typically the larger firms are capable of matching intraday, many smaller firms would need considerable development work to be able to do so, according to Pearson. 

Additionally, a T+1 settlement cycle would, by definition, shorten the timeframes for stock borrowing, meaning that to meet the T+1 deadline firms would need an auto-borrowing capability in their post-trade processing workflows.

A decade ago, he said, the idea of reducing the settlement cycle in the EU from T+3 to T+2 was met with reticence by trading firms. 

Their concern centered around two issues: the quality of trade data and the time taken for matching. 

However, after the remediation of some software and process issues, the transition was less of a challenge than anticipated for many firms, according to Pearson.

Despite a commonly held view that the challenge for firms lays in implementing amendments to systems to facilitate the settlement change, the research reveals that the challenge is in mitigating the risk that some counter-parties will not be able to fulfill their obligation to send matching details and settle trades in a timely manner.

The reason for this is data connectivity.

According to Pearson, automation in the middle-office via straight-through processing (STP) platforms is key to solving these problems.

Pearson said that he already sees appetite for STP across the trade lifecycle in the US.

“I think this will be a sea-change in the expectation and demand from the brokers and buy-side to get to the highest rates of STP,” he said.

Pearson added: “Whatever the solution put in place, in-house or outsourced, STP and automation are key. This isn’t a sensible driver to outsource however, because the risks do not go away with outsourcing, you just allow someone else to hold the steering wheel!”