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This time is different.
The sell side has a huge amount of work to do to get ready for T+1. With the May 28, 2024, go-live date coming fast, brokers are hurrying to complete a daunting schedule of planning, testing and implementation. However, even perfect execution on all these fronts won’t guarantee a smooth transition. Brokers can smooth out this transition by finding the right partner and collaborating with their clients.
Brokers rely on clients for critical data throughout the trade processing and settlement cycle. Under the new rules, brokers will need this data much earlier. The sell side will be required to complete affirmations, confirmations, and allocations process on the day of trade. In addition to ambitious upgrades of key internal functions, hitting those deadlines will require timely inputs from clients. As a result, a core part of preparing sell-side firms for the switch to T+1 will be ensuring that buy-side partners are equipped to keep pace with the new, accelerated demands.
The Securities and Exchange Commission laid down the gauntlet by sticking with an earlier compliance date of May 28, 2024, deadline for T+1, despite strong resistance from an industry requesting more time. Although the SEC still has the ability to push back the date, sell-side firms have no choice but to operate on the assumption that they have less than a year and half to prepare. That leaves firms with something in the area of six months to get ready for the industry testing that will have to precede the actual switch.
That’s not much time. The transition to T+1 poses a unique challenge. In past compressions of the settlement cycle, the industry accelerated the trade processing and settlement process through a mix of innovation and increased staffing. Firms kept pace with the shorter trade cycle by automating some functions and increasing the resources directed to functions that were still conducted manually.
In a T+1 environment, there will be no time to solve problems by throwing additional bodies at manual functions. Processes will have to be automated. Fortunately, a spate of innovation in the roughly five years since the move to T+2 has created a host of new solutions firms can use to overcome these challenges. Robotic process automation (RPA), artificial intelligence (AI), enhanced data exchange and other new technologies are widely available from a dynamic and growing industry of fintech providers. These are the tools the sell side is using to build the infrastructure for T+1.
There is no playbook on how to assemble new processes and technologies into an infrastructure for next-day settlement. Every sell-side firm has to chart its own course, identifying changes required to current procedures and finding effective solutions. Working with the right partner, who brings broader industry perspective, can help a firm create effective solutions unique to their processes and technologies.
Brokers should already be well into the planning phase. Planning should start with a comprehensive mapping of their trade cycle, and a detailed assessment of how and where the move to T+1 will impact trade processing and settlement at each point in the cycle. Analyzing those results will allow firms to flag adjustments they will have to make to technology, operations and control processes, and internal behaviors. These will not be short lists. As a result, planning must be conducted at the most granular level.
Some of the main issues firms will have to address are across the areas of trade matching and allocations, settlements, securities lending, funding and corporate actions.
From a timing perspective, firms at this point should have a thorough T+1 impact map in place, along with a working, prioritized list of action items. Now, firms should be working on a comprehensive plan for testing new procedures. Industry testing starts in August 2023. There is much to do before then. Firms will have to complete functional testing for any needed changes to their infrastructure, and then carry out regression tests to ensure the changes don’t interfere with any other internal processes. At that point, the firm should be ready for industry testing with clearinghouses, service providers, clients and other partners. Getting prepared for this rigorous process will be a challenge, and firms are already up against a time crunch.
The shift to T+1 will require significant investments of resources and time. To ensure a successful outcome and maximize the returns on those investments, sell-side firms should follow five guiding principles when developing their T+1 transition plans:
If there was ever a catalyst for automation, T+1 is it. Manual interventions that seem innocuous now will emerge as significant obstacles in a T+1 environment, causing compounding disruptions and delays. Some manual functions catalogued in the planning phase for T+1 transition will be relatively quick and easy to address—with the right solutions. Third-party vendors now provide RPA applications and other fintech tools that can be used to automate routine tasks relatively quickly, cheaply, and without interfering in other processes and functions. T+1 should provide the motivation needed to get these “low-hanging” automation projects completed now. Sell-side operations and technology teams should use the looming deadlines for T+1 transition to unlock funding for these valuable projects. Think about it like basic maintenance for your car. A full tune-up can seem costly up front but remediating minor issues now will avoid potentially more difficult issues later.
T+1 remediation efforts should never be viewed as one-off projects. All alterations required for T+1 should serve as steps in the firm’s broader and more strategic journey to straight-through processing.
SEC Chairman Gary Gensler has likened the transition to T+1 to upgrading the market’s plumbing from bronze to copper pipes. In this midst of this industry-wide renovation, focusing entirely on individual fixes for T+1 is like patching up leaks with duct tape. It’s much smarter and cost effective to direct money and time to bigger capital improvements that will enhance the efficiency of the organization overall.
Many banks and brokers still run on legacy systems that have been pieced together through multiple mergers and business expansions over the course of years or decades. Most firms are in the midst of digital transformation initiatives designed to break down siloed systems and eliminate fragmentation. One of the primary goals of these projects is to facilitate the free flow of timely and reliable data across organizations. Over the long-term, sound data management and governance capabilities will serve as the foundation of automated STP platforms that eliminate or at least dramatically reduce the need for human intervention. More immediately, consistent, reliable and timely data are basic requirements for the RPA tools, AI applications and other technology tools firms will need to meet T+1 deadlines. For that reason, firms that plan well should be able to use T+1 preparedness as a springboard toward more automated trade and settlement processes and, ultimately, to STP.
Digital transformation strategies often stretch as long as five years. With T+1 scheduled to arrive in a little more than a year, brokers will have to prioritize. As they do so, they can take advantage of some of important technological innovations like cloud computing, APIs, and software as service (SaaS). Together, these tools make it easier for firms to build next-generation technology platforms incrementally.
Organizations today can construct their technology infrastructure using “modular” design. Using this approach, firms can select the right components for each function and easily integrate them into their broader architecture, without necessarily interrupting or revamping adjacent functions. With this strategy, firms can gradually assemble individual solutions into a comprehensive, automated platform—if they start with the right plans and the right technology partners.
The move to T+1 represents a paradigm shift for the sell side. From this point on, firms will have no time for manual reconciliations of internal positions. In a T+1 environment, firms will require something close to a real-time view of cashflows and inventories across the organization.
Most firms do not have a holistic vision of their inventories—at least not in real time. Inventories are fragmented by line of business and geographies. Positions are held in multiple DTCC accounts. This less-than-transparent system is generally sufficient in a T+2 environment. It will not work in T+1. For example, in the securities lending business, brokers currently have until 3 pm on T+1 to recall securities from borrowers. In the faster settlement cycle, that deadline will be advanced to 11:59 pm on day of trade, or even earlier. In many cases, that won’t leave enough time for the broker to receive notice that the original holder of the security is selling, send out a recall to the borrower, and receive and deliver the security. Missing that deadline would most likely result in a failed trade and the introduction of market risk not to mention the knock-on impact to other parts of the post trade eco system such as corporate actions processing.
As a result, brokers will have to become much more efficient in netting out positions across their entire inventories and organizations. To do so, they will need a consolidated view of positions across asset classes, geographics and business lines. It won’t be enough to generate that view at the end of the batch cycle—it will have to be available in real time.
Upgrading to that real-time, consolidated view will create real benefits. New real-time transparency and predictive analytics will allow firms to project availability and demand and optimize inventories for lending and borrowing. The same capabilities will create similar opportunities to enhance efficiencies in other businesses.
Achieving this goal is much less difficult than it would have been just a few years ago. Today, fintech vendors offer comprehensive systems that help even the biggest sell side firms to monitor and manage inventories in real time.
Sell-side firms will have to rely on their clients to help hit new deadlines imposed by T+1. In some cases, that shouldn’t be a problem. Some buy-side firms, especially large hedge funds and asset management complexes, match their sell-side counterparts in terms of technology stack and automation. These firms should be well prepared for the switch. However, other buy-side firms are still using many manual processes, with some firms still emailing allocations to their brokers.
As they create the policies, procedures and working agreements that will govern trade processing and settlement in the new trade cycle, sell-side firms should be reviewing their client lists, assessing the capabilities and preparedness of individual clients, and flagging firms most likely to cause problems.
Sell-side firms should be reaching out to their slowest and most manual clients to help them head off issues that could disrupt the settlement process during testing or in live T+1 trading. This effort can actually serve multiple purposes. Most importantly, it can help ensure that both sides are prepared for the new deadlines imposed by next-day settlement. However, this outreach can also be positioned as an educational and advisory service to clients, creating new opportunities for positive interactions with the buy side, and potentially strengthening client relationships.
Broadridge believes the industry will need roughly five years after the start of T+1 to be ready for the ultimate move to T+0. In that timespan, regulators and market participants will have to come together to tackle three key issues:
The jump to T+1 represents a challenge unlike those posed by past shifts of the settlement cycle. Due to the intense technology and process demands required to accelerate to next-day settlement, it’s likely that the transition process will not be entirely smooth. The sell side, buy side and key market players like DTCC are working diligently to be ready. However, individual firms and the industry overall won’t know if there are major breakdowns until testing gets underway in August. If testing isn’t going well, it’s possible that the SEC could listen to industry recommendations and push back the go-live date to give firms more time to prepare.
At this point, however, the SEC remains strongly committed to the May 28, 2024, deadline. Until they hear otherwise, sell side firms must be prepared to face the risks associated with T+1 transition in less than two years’ time. That aggressive timeline leaves little time for planning, implementation, and testing. Meeting those deadlines will require close cooperation with external vendors who will provide the technology solutions needed to automate processes, accelerate the settlement cycle, and help set firms on a course to straight-through-processing. Ensuring a successful outcome at the end of that process will require one additional, important step: reaching out to a buy side that often lags behind in technological capabilities, and helping clients get ready to make the leap to T+1.
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