The impending implementation of T+1 settlement in North America is a topic of heated discussion across investment operations. While many focus on the immediate challenges of preparation, more pertinent questions loom: what will the post-T+1 market landscape look like? Will small service providers be able to hold onto their clients? And how can the pressures of T+1 settlement create an opportunity for firms to strengthen themselves for the future?
The longer-term settlement risk and client service impact of T+1 may not be evident immediately, but disparities between the successes of well-prepared organisations and those who are less prepared will be evident by late summer this year. Larger institutions, equipped with greater resources and substantial manpower, will likely find it easier to adapt to the accelerated settlement cycle. Much of the current dialogue around T+1 settlement preparedness has been generated by these larger institutions, particularly across North America and Europe.
Comparatively, the input of smaller service providers and those based in other global regions – specifically APAC – to these conversations has been minimal, raising some concern around broader market readiness. An inability to consistently settle within the new, tighter window could lead to business losses for unprepared firms over time. Once T+1 becomes ‘BAU’, clients will be less inclined to accept increased fail rates or capital lock up from one provider if another is seen to be managing the change with less disruption. This new factor in an already competitive landscape may lead to client migration.
Recent analysis from BNY Mellon shows that without changes being made to meet the tighter timeframes, market participants could see fails rates increase to 30%. In the absence of proactive steps and enhanced automation, the likely solution for many firms will be reallocating resource towards managing fails, which will increase pressure on operational teams who may already have been impacted by the recent wave of well publicised institutional redundancies.
Beyond the risk of increasing fail rates and potential competitive advantages, market participants may be wondering what other incentives there are to drive all organisations to adapt, particularly given the SEC’s current non-enforcement stance. Unfortunately, many of these incentives lean towards a negative impact that firms would want to avoid. For example, inefficient processing or ineffective organisational set up could lead to organisations pre-funding cross-currency or out-of-market trades to mitigate FX risk, impacting liquidity due to the need to hold more cash. Stock lending, a crucial liquidity source, may become more expensive in order to support operational efficiency to align with requirements needed to achieve T+1.
However, in the long term, a global shift to T+1 settlement cycles presents a substantial opportunity for firms to create stronger business propositions through efficient and timely trade processing. The need to make the most of that opportunity is reinforced by the upcoming refit of the Central Securities Depositories Regulation (CSDR) Settlement Discipline Regime, which is likely to increase penalties for trade fails, potentially by seven to 10 times (ESMA December 2023 paper). While limited prime broker providers currently consistently share penalty insight with their buy-side clients, the proposed changes in the penalty structure will provide greater incentive for all impacted organisations to investigate cash impact, raise claims, and pass on the charges where appropriate.
Ultimately, whether looking to ensure robust processes under an accelerated settlement regime or to mitigate risk of increased failed transaction penalties through CSDR, TMPG or the forthcoming GoC regime, firms need to continue to focus on timely settlement. Some organisations, both buy- and sell-side, have begun reallocating resource from managing trade fails to preventing trades from failing, a much needed behavioural and operational change.
In order to successfully achieve this change without simply increasing manpower, data centralisation, normalisation and transparency are key. Many firms struggle to access good quality and consistent data, often due to the lack of standardisation across institutions. This disparity in data quality and timeliness hinders effective real time decision-making as well as limiting trend analysis. This is particularly true of less technologically advanced firms who may lack the necessary structures and resources to efficiently normalise data received from multiple sources, or who may receive very limited data in the first place.
By eradicating this data normalisation challenge through leveraging of data feeds across the market, AccessFintech (AFT) is at the forefront of preparing firms for T+1. AFT’s data universe is collected from an extensive network of executing brokers, prime brokers, and custodians, and made available to those parties, as well as their hedge fund and asset manager clients. Consumption, normalisation and assessment of transactions is real time and covers over half of the global equity and fixed income trade activity. The real time assessment includes a fail prediction service that enables organisations to leapfrog investigation of potential issues and move straight to taking the right action to prevent trade fails before they happen.
This service has seen organisations benefit from fail rate reductions of up to 40% and query traffic reduction of up to 90%, releasing operational capacity from repetitive, reactive manual tasks and enabling successful proactive action even in a shorter settlement timeframe.
By mid-2024, we anticipate that approximately 85% of all market equity and fixed income volumes will be processed through AFT infrastructure, creating even more opportunity for organisations to revolutionise their operational processes and meet market and regulatory challenges regardless of settlement timeframes or penalty regimes.
The T+1 transition demands a strategic re-evaluation of operations, data management, and regulatory compliance. As we navigate this transition, the market’s ability to adapt, innovate, and collaborate will be critical. The future post-T+1 looks promising for those prepared to embrace these changes and harness the opportunities they present.