Advancing Development Efforts: Developing for T+1 Settlements
In the fast-paced world of financial services, where transactions occur at lightning speed, settlement processes play a vital role. Traditionally, trade settlements used to occur on a T+2 (Trade Date plus two business days) basis. However, with the evolving technology landscape and growing demands for real-time transactions to mitigate risks, the industry has embraced the challenge of transitioning to a T+1 settlement cycle by May 28th, 2024. To meet this shift requires significant development efforts to ensure seamless and efficient operations. In this blog post, we will explore the development initiatives being undertaken by financial institutions to meet T+1 settlement requirements.
Understanding T+1 Settlement
T+1 settlement refers to the process of settling trades within one business day after the trade date. This accelerated settlement cycle offers several advantages, including reduced counterparty risk, increased liquidity, improved operational efficiency, and enhanced market stability. However, achieving T+1 settlement demands substantial technological advancements and collaborative efforts across the financial industry and within each organization itself.
Development Initiatives for T+1 Settlement
Robust and Scalable Trading Platforms:
- To accommodate the increased trade volume and reduced settlement timeframe, financial institutions are focused on developing or upgrading their trading platforms. These platforms need to be robust, scalable, and capable of handling large volumes of trades with minimal latency. Trade Order Management Systems (TOMS) and Execution Management Systems (EMS) will need to be updated to facilitate efficient trade capture, execution, and confirmation processes with lower latency requirements. And there should be an expectation that trading volumes will increase with increased liquidity created by T+1 settlement time, in addition to the potential cost savings associated with each transaction.
Straight-Through Processing (STP):
- Automation through Straight-Through Processing (STP) has become crucial for meeting T+1 settlement requirements. STP enables end-to-end automation of trade processing, eliminating manual intervention and reducing the risk of errors. Unfortunately many firms have continued to rely on antiquated communication methods (e.g., emails, faxes) to complete trade settlement. These inefficient communication channels have contributed to errors and delayed trades even during T+2; under T+1 they will be untenable. By implementing intelligent workflows, financial institutions can automate trade capture, enrichment, matching, confirmation, and settlement processes. This automation will significantly reduce operational costs and enhance efficiency while ensuring compliance with regulatory standards.
Real-Time Trade Matching (RTTM) and Real-time Transaction Reporting Systems (RTRS):
- To achieve T+1 settlement, real-time trade matching is essential. RTTM will provide a common electronic platform for collecting and matching trade data, enabling the parties to monitor and manage the status of their trade activity in real time. Through RTTM, the parties can track a transaction from trade entry through to clearance and regulatory reporting. Real-time matching ensures that discrepancies are resolved promptly, enabling timely settlement and reducing operational risks.
- Another nuance that needs to be “baked in” to automatic reporting for compliance with FINRA Rule 2232 includes the “Customer Confirmations” Municipal Securities Rulemaking Board (MSRB) Rule G-14. This requires that Transactions effected with a Time of Trade during the hours of the RTRS Business Day shall be reported within 15 minutes of Time of Trade to an RTRS Portal.
Enhanced Data Management and Analytics:
- Meeting T+1 settlement necessitates robust data management and analytics capabilities. Financial institutions are investing in advanced data infrastructure and analytics tools to capture, store, and analyze vast volumes of trade and settlement data. By leveraging technologies like big data analytics, machine learning, and artificial intelligence, institutions look to gain valuable insights into trade patterns, identify potential settlement risks, and proactively address any issues that may impact settlement efficiency.
Collaboration and Industry Standards:
- Transitioning to T+1 settlement cannot be achieved in isolation. It requires collaboration among financial institutions, market infrastructures, and regulatory bodies. Collaborative initiatives facilitating the development of common infrastructure, the standardization of data formats, and streamlining of communication channels will all ultimately enable efficient T+1 settlement operations. In fact, as the industry moves to the go live date for T+1 settlement, testing will begin in earnest on August 14th 2023 for which Depository Trust Clearing Corp (DTCC) has released a Detailed Testing Framework. Look for more information from us on this topic soon.
Consider Long-Term Technology Updates & Maintenance
- Once the May 28th, 2024 date has passed the work doesn’t stop. Current plans need to take this into consideration. How will your organization continue to operate at a T+1 settlement or better rate? Technology upgrades and maintenance will be paramount in meeting the demands required to support the T+1 clearing cycle and an almost inevitable eventual upgrade to same day trading. A shorter settlement period inherently means less time to correct mistakes, and less time to search for a root cause if not already known.. Systems that successfully address this change will prioritize automation and resiliency as well as upgradability and service-level maintenance. If implemented properly, you can reduce failure and error risks while supporting increased processing demands.
- To cope with this new transition to T+1 settlements, a review of the entire front-to-back process across the trade life cycle – including everything done on trade date, immediately after trade, through to settlement – is required. Root cause analyses need to occur to identify inefficiencies and what can be to improve them. Organizations will want to cast an eye toward the tooling of their IT operations to platforms that facilitate change risk visibility and root cause analysis.
As the financial services industry evolves, meeting T+1 settlement requirements has become a crucial objective. This shift demands significant development efforts to enhance trading platforms, automate trade processing, eliminate manual processes, enable real-time matching, strengthen data management and reporting capabilities, and foster collaboration within the industry. Financial institutions are embracing technological advancements and implementing innovative solutions to achieve T+1 settlement, ultimately benefiting from reduced risk, increased operational efficiency, and improved market stability. By leveraging these development initiatives, the industry is poised to thrive in a rapidly changing landscape, catering to the evolving needs of investors and market participants alike.