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The road to T+0

The Regulators continue to move forward with requirements to build trust in the financial services industry. The latest being on trading and settlement times. From 28 May 2024, trades made on the US financial markets must be settled within just 24 hours (T+1).

Across the globe, we can see progress made by India having already implemented T+1, Canada aims to follow suit on a similar timeframe to the US, with EU and UK consulting the industry on T+1 now.

This requirement is by no means an easy feat. Investment firms, yet again, struggle to ready their systems in time. It could be argued that now's the time to refocus the industry’s current philosophy of wait and see to a longer-term strategy of anticipating regulatory change by planning to ready systems for T+0 now.

With this in mind, the Securities Exchange Commission (SEC) released a paper on 15 February 2023 "Shortening the Securities Transaction Settlement Cycle," which states that "the Commission continues to believe, as it stated in the T+1 Proposing Release, that the transition to a T+1 settlement cycle can be a useful step in identifying potential paths to T+0 settlement "Implementation of T+0 now lowers compliance and operational risk in the future.”

Why are settlement cycles are being accelerated?

In February 2021, the Depository Trust & Clearing Corporation (DTCC) published a white paper stating the need to accelerate settlement cycles from trade date plus 2 days (T+2) to trade date plus one day (T+1), to reduce risk in volatile markets.

Accordingly, the DTCC joined forces with the Securities Industry and Financial Markets Association (SIFMA) and the Investment Company Institute (ICI) to bring about this change. As a result of their work, on 15 February 2023 the US Securities and Exchange Commission (SEC) adopted final requirements for a 28 May 2024 implementation date for the move to T+1.

Why should we look ahead and ready for T+0 now?

With system testing for T+1 having commenced in August, many firms are finding that their systems are not ready and will be stretched to make the T+1 deadline. The requirement to remove manual processes and move to automation has already been scoped out, taking the extra step to T+0 means an opportunity savings can be achieved by anticipating further requirements by the regulators. This in turns removes future disruption to the firm allowing it to operate efficiently during periods of significant change.

Additional benefits of adopting post trade T+0 systems

Advances in cloud-native digital platforms mean that firms can rapidly and seamlessly transition to real-time affirmations and confirmations that enable T+0 settlement. In addition to meeting the long-term regulatory drive to accelerate settlements, adopting T+0 capabilities lead to other significant benefits:

- Lower risk of delivery failure. Estimates suggest that same-day confirmations reduce failure to deliver risk (where one party in a trade does not fulfil their obligation to deliver securities or cash to the other party by the settlement date) by over 53 times according to the DTCC. This is because rapid settlement processes leave less time for counterparties to default or face liquidity issues. What's more, faster processing means that any issues related to a trade are identified and resolved rapidly, further reducing the chances of failure.

- Cleaner Start of Day (SOD) positions. At the start of the day asset managers compare the SOD position provided by their custodian with the SOD position on their books. Traditionally asset managers have to spend time reconciling any breaks or exceptions between the two before they can start trading. T+0 means that there are fewer breaks at the start of day because these would have been identified and remediated on trade date. This drives efficiency for asset managers.

- Lower NSCC margin volatility. The National Securities Clearing Corporation (NSCC) calculates margin requirements with the aim of covering potential losses between the last settlement and the time a defaulting member's portfolio is liquidated. As this calculation is based on available settlement data, delay in settlement times as well as higher risk of delivery failure lead to higher and more volatile NSCC margins. T+0-ready systems mean that trade data is kept up-to-date in near real-time allowing faster confirmations, fails management, and settlement, which could lead to up to a 41% lower NSCC margin according to the DTCC.

Automating daily processing requirements to focus on exception management

Implementing a strategy that is T+0 ready, means that back- and middle-office staff can automate the now laborious daily processing of trades and spend more time on value added tasks like exceptions management.

HUB Trade Connect is designed to provide clients with a unified point of oversight and interaction for trades across all asset classes and investment strategies. Our solution automates the process of affirmations and confirmations, and has smart exception management features, advanced workflow capabilities which include robust communication tools.

Additionally, the solution is cloud-native, AI-integrated with built-in collaboration capabilities and can integrate with the majority of market participants.

If you would like to learn more about Hub and our solutions, please contact us here.

The road to T+0
William Dulude

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