T1 transition highlights the need for a modern market data stack

The speed at which money moves through and around our economy has never been faster. Whether you’re looking at P2P payment apps like Venmo, Bitcoin’s meteoric rise, or the recent rollout of the Federal Reserve’s FedNow instant payment service, paying and receiving money is barreling towards real time becoming the standard.

After years of innovation propelled payments forward, the capital markets are playing catch up, but stand at the precipice of a significant move forward with the implementation of T+1 settlement.

The industry’s journey towards T+1 settlement entered a new phase in August, when the DTCC began its testing program for market participants to evaluate their processes in advance of the May 28, 2024 implementation date.

Firms are well underway when it comes to re-orchestrating back office and operational processes and systems to accommodate for what amounts to a 50% reduction in settlement time. A March 2023 survey from The Value Exchange gauging industry readiness, which covered more than 280 organizations across the global investment cycle, showed that 61% of respondents were in the process of or had completed their work to accommodate for T+1. While this survey is now six months old, we can assume that these figures have increased significantly, and the testing program should provide a good barometer for many firms as to how much more work is left to be done.

T+1 has given firms an opportunity to take a step back, reevaluate, and upgrade their operations and technology holistically, instead of creating workarounds that stress already stitched together legacy systems.

The aforementioned Value Exchange report revealed that 65% of firms cite dependencies on legacy technology as either blocking or slowing progress in preparing for T+1.

One important component of this comprehensive overhaul is market data infrastructure. Data processes need to be rewired to be on demand as settlements move faster, especially when it comes to post-trade processing and reconciliation.

Phasing out batch processing

Batch processing has long been the norm for many facets of market data processing, particularly among smaller firms in the ecosystem that don’t have the human capital resources, compared to their tier 1 counterparts.

With settlement times being compressed by 50%, this is quickly becoming an unviable process in the long term, as systems will not be able to cope with increasing volumes that will come as a result of T+1.

The issue can quickly snowball, bringing increased costs in the form of more patchwork systems to avoid settlement failures.

To highlight one example of how changing settlement times underscores the importance of leveraging on demand and accurate market data, look to how a faster settlement time may impact a buy/avoid decision on a dividend.

The most common date shown on investor websites is ex-dividend date, but investors actually need to know record date to buy or avoid a dividend. Record date is the ex-date minus settlement time, so fund providers will need to adjust their logic for generating record-date, while also making sure record date is more widely available after the change. This is where having a modern market data stack, with high quality, accurate data is accessible on demand, can make all of the difference.

Setting the stage for “T+0” or intraday settlements

T+1 also presents an opportunity to future proof operations in anticipation of further accelerated settlement requirements down the line. It’s not far-fetched to believe that T+0 is on the horizon, and something that’s been in the back of everyone’s minds for quite some time. An Accenture survey from July 2022, found that the overwhelming majority of firms are anticipating a move to T+0 in the future, with 86% indicating that they are considering intraday settlement in their current T+1 efforts.

In the lead up to T+1, firms that take a proactive approach to overhauling their back office systems and processes will be in the best position to succeed in the long-term. Having a modern market data foundation in place as part of a firm’s overall back office architecture at this critical juncture cannot be overstated. Organizations that may have previously settled for “band aid” solutions have the opportunity to look under the hood and reevaluate their market data technology/vendor partnerships as part of that exercise. Given the critical role market data plays in keeping capital markets running, it is only going to become more important as we move toward T+1 settlement, and beyond.