Beginning on May 28, 2024, the standard settlement cycle for most broker-dealer transactions in securities will change from two business days after the trade date (T+2) to one (T+1). The shift from T+2 to T+1 was driven by both the industry (via SIFMA, ICI, DTCC) and the Securities and Exchange Commission (SEC), and it covers trades in equities, corporate bonds, unit investment trusts, mutual funds, ETFs, ADRs, and options. While this shorter settlement cycle is designed to benefit investors and “reduce latency, lower risk, and promote efficiency as well as greater liquidity in the markets” according to SEC Chair Gary Gensler, for firms managing these transactions, getting from T+2 to T+1 presents major challenges.
The Impact of Losing a Day
A T+1 settlement cycle requires trades to be settled one day after the trade transaction date. To meet this tight settlement window, the industry is recommending that trade allocations be completed by 7 p.m. ET and trade confirmation and affirmation be completed by 9 p.m. ET on the trade date. This means that trades must be allocated, confirmed, and affirmed just five hours after markets close – including resolving exceptions. That is not a lot of time for organizations that have built their settlement procedures around managing exceptions and settling trades during the next business day.
Managing settlement after the market closes instead of the following day is also a challenge for the trading team, who typically start work as early as 4 a.m. for pre-market trading. Under T+2, many firms use the early mornings to manage post-trade processing before the market opens. This is no longer an option if they plan to meet the T+1 deadline.
Settlement Processes Will Have to Change
Each firm has to review its processes, collaborate with counterparties, and determine how they can streamline settlement workflows as the transition deadline approaches. Instead of waiting until markets close to do their allocations, they may have to send transaction data throughout the day to avoid overwhelming brokers and systems at the end of the day.
Firms will no longer have the luxury of waiting a day to determine if they need to fund a trade with a money market balance. T+1 will require firms to keep a closer eye on their liquidity to make sure they have the cash available to fund a stock purchase on the trade date. There may also be issues with foreign trading, since many of those trades will remain on T+2 cycles. This will create timing differences in funds owed and funds received.
Technology Updates Are Required
At a minimum, all market participants must update their portfolio accounting systems and trade order management systems to make sure the system settings are properly set up for the new trading cycle. These changes have to occur over the holiday weekend, because trading the week of May 20 will follow the existing T+2 cycle and trading beginning on Tuesday, May 28 must adhere to the new T+1 cycle. This may involve creating new dataflows, installing software patches, and even code changes on some older systems.
If you run reports or share screenshots of trading activity with counterparties as email attachments or faxes, this process will be too slow for T+1. Custodians and brokers may need to receive data in machine-readable formats to accelerate data loading directly into their systems, so you probably want to invest in an electronic trading system to ensure trades are settled quickly and efficiently. An electronic method for allocations with a direct connection between ETF issuers and order management systems will efficiently move trade information downstream from the trading desk.
Workflow Adjustments
Perhaps the most difficult change is the necessary change to human workflows. Under T+2, the trading desk can shut down after market hours and leave post-trade processes for the next day. Under T+1, post-trade processes cannot wait until the next morning, so trading operations teams will need to have people available during East Coast evening hours to monitor post-trade activity, resolve issues, and process exceptions.
Rules will have to be in place to automatically manage common or minor exceptions without requiring individuals to call or email counterparties, because there just won’t be time for long discussions and approvals. If each exception requires even 10 minutes of discussion, you will soon run out of time and miss deadlines.
You also need people who are willing to work after-market hours. If your team starts work at 4, 6, or even 8 a.m. ET, they have worked a full day by 4 p.m. ET and are not going to have the focus, energy, or desire to spend hours on post-trade work.
MD Solutions Can Help – Assistance from the Frontline
If you do your own assessment and you are not sure that you are ready for T+1, MD Solutions can help. We can analyze your systems and procedures and create a plan to get you ready for May 28. In fact, we have our own trade settlement team, and we already created our plan to update their systems and processes to ensure they are ready for T+1.
First, we can provide a quick analysis of your tools and workflows and make recommendations to help ensure you are prepared. Our team can update your software programs, or we can outline the steps you need to take to update your systems to ensure you are ready to go on May 28. We can provide workflow suggestions to help you adopt to the shorter timeline.
Second, you may determine that there is no way for your team to manage T+1 settlement. If so, you are not alone and our team can fill the gap.
We have a trade settlement team to provide after-hours trade settlement support to firms that do not have the capacity to handle all the after-hours work. Our experienced trade settlement team is located across the globe, ensuring we always have trade settlement experts working day and night to make sure no one misses a trade settlement deadline.
Are you ready for T+1? If you are not sure, contact MD Solutions today and we can make sure your team is ready to switch from T+2 to T+1.