The transition to T+1 trade settlement in the U.S. and Canadian Markets is just around the corner, with implementation scheduled for May of 2024. This settlement shortens the standard cycle for most securities trades from two days (T+2) to one day after the date of trade.
Potential benefits
If what the former SEC commissioner, the late J. Carter Reese, said in 1993 is still true that “Nothing good ever happens between trade date and settlement date,” then the U.S. capital markets should see a significant reduction in “nothing-good ever-happens” risk. Industry consensus is that the acceleration of trade settlement from T+2 to T+1 will enable firms to[1]:
- Better manage counterparty risk
- Optimize lower margin costs
- More efficiently deploy capital
- Enhance much-needed liquidity in the capital markets
The DTCC (U.S. Depository Trust & Clearing) estimates that the removal of one day’s risk in the trade lifecycle will reduce the volatility component of clearing house margin requirements by 41%.[2] Added to these benefits are the cost efficiencies resulting from business process re-engineering in trade lifecycle “pain points,” such as trade matching and affirmation processing, which will serve to achieve greater operational efficiency and higher levels of STP (Straight-Through Processing).
Potential challenges
Besides the impact on trading desks, the migration to T+1 has an effect on other areas of the business such as securities lending, listed and OTC derivatives, custody, margin and collateral processing, foreign exchange, cash borrowing, and corporate actions. While systems testing occurs in controlled environments so programming changes can be verified based on test cases and expected results, regression testing is imperative to ensure that these changes do not introduce new defects in systems that support legacy or “in flight” trades.
Firms face a challenge in that the systems design and re-engineering required to support T+1 is not done on a tabula rasa basis. The enterprise architecture is most often developed on a siloed basis: business unit silos, data silos and functional silos. In some cases, T+1 readiness has required breaking down these siloed walls to consolidate data, applications and processes across the entire enterprise.
Testing is underway
The benefits of T+1 are many, but the heavy lift required to execute this transformational change is culminating in tightly coordinated testing efforts by all segments of the capital markets ecosystem: technologists, asset managers, broker/dealers, custodians, prime brokers, service providers, transfer agents, regulators and investors. These testing efforts include critical components of the industry’s infrastructure from exchanges, such as Nasdaq and Cboe Global Markets, to DTCC’s clearing and settlement subsidiaries: the NSCC (National Securities Clearing Corporation), DTC (Depository Trust Company) and ITP (Institutional Trade Processing).
By now, most firms will have undergone internal systems testing as well as testing with clients and targeted external entities. Crucial to the success of the migration to T+1 is the industry-wide testing program, which officially began on August 14 and continues apace, leading up to the go-live date next May. Firms can test the modifications that have been made by participating in the program’s 21 bi-weekly testing periods. According to DTCC: “The industry-wide testing program supports end-to-end testing capability, allowing firms to test the full trade lifecycle from their internal pre-execution systems to DTC post-trade settlement.”[3]
The time and effort required for thorough testing must also be considered in relation to the day-to-day resources required to “run the business.” Life goes on, trades continue to be executed, cleared and settled, securities continue to be borrowed and lent, and corporate actions along with many other activities will continue.
If history is any indication, based on the smooth migration to T+2 in 2017, all expectations are that the industry will once again rise to the T+1 challenge.
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[1] “Accelerating the Securities Settlement Cycle to T+1 in the United States”, SIFMA, 13 August 2021 www.sifma.org/resources/submissions/accelerating-the-securities-settlement-cycle-to-t1-in-the-united-states/
[2] DTCC proposes approach to shortening U.S. settlement cycle to T+1 within 2 years, Depository Trust & Clearing Corporation, 24 Feb 2021, https://www.dtcc.com/news/2021/february/24/dtcc-proposes-approach-to-shortening-us-settlement-cycle-to-t1-within-two-years
[3] T+1 Test approach, Depository Trust & Clearing Corporation, August 2022, https://www.dtcc.com/-/media/Files/PDFs/T2/T1-Test-Approach.pdf
