A report from Torstone Technology, a leading SaaS platform for post-trade securities and derivatives processing, and Chartis Research, a globally recognised authority in research and advisory services, has revealed that legacy middle and back-office infrastructure needs to be upgraded to support the shift to a T+1 settlement cycle, or risk non-compliance.
The report, “Transitioning to T+1 Settlement: Obstacles and Solutions,” dissects the implications, benefits, and hurdles that market stakeholders need to grapple with ahead of the proposed May 2024 implementation date. It highlights that the transition to T+1 settlement comes with considerable challenges that must be carefully managed, categorised into three areas:
• System Preparedness and Compatibility: Current infrastructure needs to be upgraded or revamped to cope with the accelerated settlement cycle. Neglecting this may result in operational roadblocks, system failures, and trade settlement delays.
• Coordination and Interoperability: Market players need to synchronise effectively to guarantee the successful execution of T+1 settlement. Foreign investors will encounter additional obstacles due to the disparity in settlement cycles among markets.
• Regulatory Adherence: The introduction of T+1 settlement will require market players to adhere to new rules and regulations, adding further trade-allocation tracking, data storage, and reporting responsibilities.
The report underscores the need for strategic planning, considerable technology investment, and extensive training and education for all market players to guarantee a successful shift to the T+1 settlement cycle. It stresses the urgency to tackle inefficiencies and enhance automation throughout middle and back office processes in response to evolving market dynamics.
Brian Collings, CEO of Torstone Technology, commented, “Firms that overlook the necessity to adjust to these market structure evolutions driven by the industry will face significant risks, both operationally and competitively, in a demanding market. The days of manual processes and batch processing are numbered as they don’t align with the shift to truncated settlement cycles. Companies must modernise and automate their middle and back office systems or face substantial operational risks.”
Market participants are advised to utilise existing post-trade technology solutions and progressively adopt phased programs to streamline their post-trade workflows. These strategic long-term plans for infrastructure advancements will guarantee preparedness for potential future shifts to T+0 settlement.
The transition to a T+1 settlement cycle marks a pivotal point in the financial industry, anticipated to offer a multitude of benefits including:
• Reduced counterparty risk through same-day affirmation (SDA).
• Increased efficiency and streamlined trade corrections.
• Improved liquidity management with faster access to funds.
• Reduced collateral requirements and volatility in clearing house margin requirements.
• Eventual alignment across global markets, leading to enhanced market stability.
Jay Wolstenholme, Research Directory, Chartis Research added, “Moving to T+1 from T+2 in the US and Canada compared to previous moves is definitely a step up in complexity. Buy-side trade affirmation/ confirmation obligations are significant and the sell side and buy side need to be in closer synch,” said Jay Wolstenholme, Research Director at Chartis. “For the May 2024 conversion date, much of existing technology will have to hold, but it’s definitely the catalyst for both buy-side and sell-side to reevaluate technology reengineering to not only meet this deadline but also inevitable future settlement modifications.”