The impact of T+1 on transaction management

The impact of T+1 on transaction management
T+1: swifter transaction management | Xceptor

Continuing our blog series evaluating the impact of T+1, this blog addresses the need to automate transaction management to meet intra-day trade settlement

The benefits enjoyed in the move from the T+3 settlement cycle to T+2 was due, in part, to an increase in operational efficiencies, better coordination across market participants, changes in technology, communications, and legal and compliance groups. The same commitment to embracing change will be required for a successful migration from T+2 to the T+1 settlement cycle.

What products are in scope?

Corporate bonds, mutual funds, equities, security-based swaps, Unit Investment Trusts (UIT), Exchange Traded Funds (ETF), ADRs, and share options.

Preparations and baseline metrics

All firms should be analysing the impact of T+1 to address changes and dependencies. Each firm will have slightly different business models, system infrastructure, operational processes, internal deadlines, geographical and regional restrictions, and regulatory requirements.

Analysis should look to capture current trade volumes, fail rates, allocation rates, and affirmation rates. This can be used to review system-to-system data flow and the remediation employed. Metrics provide a baseline from which automation of non-STP processes, and the wider operational performance, can be evaluated.

Rapid allocations and affirmation processing

Often, the affirmation and confirmation process begins after trades have been fully allocated at an account level. This allocation process causes delays as a considerable number of allocations are received in sub-optimal formats such as free text in email, Excel, or Dropbox for STP.

Currently many allocations are processed after market close. This is less of an issue as in T+2 the current affirmation deadline is 11:30 ET. The affirmation cut-off in T+1 is likely to be around 21:00 ET on T0. Therefore, a T+1 settlement cycle will compress allocation timeframes, raising trade break numbers if allocations are not completed promptly.

Updating legacy technology systems and processes

Legacy processes and system performance throughout the transaction lifecycle should be reviewed, to improve efficiency and increase automated processing rates for allocations and affirmations.

Firms should consider deploying technology solutions, and reviewing the messaging protocols used by systems, to drive out inefficiencies and achieve a higher STP rate.

When assessing readiness for the move to T+1, consider:

  • Determining the business lines with sub-optimal processes that will be affected by an accelerated settlement cycle and identify how to mitigate the impact
  • Identifying the number of tasks requiring manual intervention that occur in the current trade process
  • Pinpointing the day-to-day operational procedures that will need to be optimised or eliminated to support a compressed timeline
  • Identifying whether existing exception management processes and systems can highlight potential fails early enough for quick, efficient escalation and remediation

Managing corporate actions

Compressed timeframes

There is concern around the reconciliation and timely settlement of trades on securities subject to corporate action. A voluntary corporate action event will need a firm to consume the event notice, identify and generate client entitlements, execute a reconciliation, and provide the client instructions to the DTCC in a compressed time.

Location of inventory

Determining the location of their inventory is a significant issue facing custodians in the current settlement cycle. It is vital to daily operational processes as it feeds into the elements of each corporate action event. Migration to the T+1 settlement cycle will exacerbate these concerns.

Generic approach

Firms should consider an opportunity to review all generic processes, irrespective of the markets they serve. Although the move to T+1 is not imminent in all countries, it is important to think in terms of a generic process for all messages relating to corporate actions in the trade lifecycle.

Next steps

As with the settlement of all impacted securities, firms should be engaged in a process of identifying sub-optimal and manual processes and systems around corporate action events impacted by the compressed timelines.

Prepare test environments as soon as is practicable. The DTTC updated their T+1 Playbook in December 2022, which includes a detailed implementation schedule, interim milestones, and identified dependencies.

The final area of preparation is for firms to review and ensure robust and efficient exception management processes and tools. Compressed timelines will mean early identification, escalation, and mitigation processes will become a core means of reducing operational risk during and following migration to the T+1 settlement cycle.

Look out for the next blog in our T+1 series, focusing on automating the Confirmations process.