Implications of T+1: Assessing Your Firm’s Readiness
May 1, 2024
Read Time: 8 minutes
Regulation
On May 28, 2024, settlement cycles for U.S. investments went from two business days to one, affecting stocks, bonds, ETFs, and other instruments. A small amount of affected firms might have a seamless transition, but others may face serious challenges in managing and adjusting to shorter timelines for investment, trading, and tax decisions.
Having access to real-time, high-quality data on trades, securities custody, and cash positions is key for a successful transition to T+1. The current pre-matching affirmation process shifts to 9 p.m. (from 11 a.m.) on the same day as the trade, effectively pushing both U.S. and international institutional investors to adopt new operational procedures.
Engineered to strengthen market integrity, the SEC pushed for T+1 as a response to market volatility during the COVID-19 pandemic and the increase in meme stock trading, both of which exposed risks in the U.S securities market. Usually, a shorter settlement cycle helps mitigate common risks and enhances market stability.
Effective data governance plus accurate, real-time data is crucial as firms continue to transition to T+1. The main focus should be on key data areas to enable operational readiness, such as cash balances, trade files, stock borrow transactions, and affirmations.
With a slim margin for error in the shortened settlement cycle, firms must adopt a more strategic approach that includes comprehensive planning and collaboration across industry stakeholders. The positive news: in aligning the U.S. with global settlement standards, the transition reduces risk, boosts liquidity efficiency, and advances technological capabilities.
To mitigate operational and behavioral changes that come with major transitions, teams need to recalibrate workflows, affirm transactions earlier in the day, or move processes to T+1 or the trade data.
Make no mistake – firms unprepared for T+1 will face require operational and technological upgrades, as global markets have already been adapting to shorter settlement times. The upside? This shift brings benefits such as reduced systemic and counterparty risks, alongside better capital efficiency.
Global macro and multi-strategy asset managers must be aware of the upcoming challenges that come with various settlement cycles across regions. Managing cross-border trades may require additional risk management, and firms trading ETFs should consider potential discrepancies in global securities transactions.
To capitalize on the opportunities ahead, asset managers should review their tech stacks and processes to ensure they’re prepared for T+1. Many third-party solutions now offer automation for middle- and back-office functions and streamlined straight-through processing – all of which are critical for a time-sensitive environment like T+1.
This regulatory change highlights the need for continuous innovation in the financial markets, and firms that are proactive in their preparations will be well-positioned to thrive for future advancements, such as T+0 or AI-driven applications. As the T+1 adoption continues, firms must reassess their technology and operational strategies by investing in the right tools and collaborating with the best partner.
The deadline has past, but firms can still achieve T+1 success, minimize disruptions, and ensure a seamless integration by planning their tech transformation.
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