On February 15, 2023, The Securities and Exchange Commission (the “SEC”) announced a final ruling to implement a trade-plus-one settlement cycle for most broker-dealer securities transactions creating operational efficiency and reducing credit, market and liquidity risks. This move from a T+2 to a T+1 settlement cycle is looking to address unpredictable market volatility events that have led in the past to increased investor risk, such as the “meme stock” craze of 2021 and the COVID-19 pandemic.
To stay compliant, affected securities must obey the new rules as of May 28, 2024.
A brief history of settlement cycles
A settlement period is defined as the time between the trade date and the settlement date. The SEC is responsible for governing the rule around trading processes, inclusive of creating settlement dates. Historically, the settlement cycle has dramatically reduced over time. At its origin, the rules stipulated T+5 in 1976. Thereafter, a push led by the National Securities Clearing Corporation (NSCC) and Depository Trust and Clearing Corporation (DTCC) amended the rules to T+3 in 1995. Next, following the financial crisis in 2008, the settlement cycle became T+2 in 2017, with initial conversations of T+1 already in the works. The securities that will be impacted by this change include US Equities, Corporate and Municipal bonds, and Spot foreign exchange (FX). The United States is following the lead of both China and India who previously both moved to the T+1 settlement cycle.
Advantages of the T+1 settlement cycle
The new rules will bring forth vast positive change in the trading space. The T+1 settlement cycle will …
- improve the processing of institutional trades
- increase capital flow and decrease the capital required to collateralize risk
- reduce operational risk and the number of unsettled trades at any given time.
- give investors faster access to their cash or securities
- reduce margin requirements, empowering investors to take advantage of more investment opportunities than was possible in a T+2 settlement cycle.
Yet challenges and risks remain.
Technical challenges brought by T+1 settlement
While a relatively ‘simple’ regulatory change on the surface, the move from T+3 to T+2 settlement cycle triggered a major overhaul of technology and operational processes which had been built over decades. Moving from T+2 to T+1 will similarly impact operations and require processes to be rebuilt and modernized.
All manual processes will immediately come under scrutiny and the push for automated tooling will be non-negotiable. Additionally, straight through processing (STP) must be highly efficient. The implementation of T+1 will in fact move many operations to the same day.
For example, any overnight batch analysis that occurs within the current T+2 window may need to be re-engineered to happen intra-day, in an almost real-time fashion. This could be a significant engineering effort. Furthermore, a huge amount of organizational muscle memory will exist to ensure end of day batch processing works smoothly. This will need to be re-trained once the difficult engineering task of moving to intraday processing happens.
With a smaller time window between trade acceptance and settlement, there is less time to spread the load from particularly volatile trading periods. Some systems may need to increase their peak processing capabilities. Moving such systems to the cloud is an obvious choice to create cost-effective headroom and flexibility for higher processing requirements, but this is far from an immediate exercise.
The risks of not properly planning, executing, testing, and remediating such wholesale system upgrades are continual failure to meet the new T+1 settlement requirement. Yet, there are clear limitations to the technology currently in use at any capital market firms.
Here is how to get started on your T+1 journey:
- Review existing technology in use
- Automate processes
- Evaluate Cloud capabilities
- Incorporate T+1 into your overall digital transformation projects across the enterprise
T+1 are you ready? Where Adaptive can help!
With 12+ years and 200+ projects across 3 continents and in every asset class, Adaptive delivers high touch consulting and cutting-edge, bespoke trading technology with delivery at its core. Whether it’s a greenfield solution across the organization or a specific area of expertise, we work with capital market teams at any point in their roadmap to consult, design, implement or accelerate trading solutions.
More specifically, Adaptive has helped improve straight-through processing (STP), by analyzing business workflows and designing steps that can be automated, such as trade validation, trade confirmation, trade affirmation, etc.
Moving to the Cloud - We are the experts when it comes to putting your critical trading systems into the public cloud and have successfully migrated different types of trading workflows. Our Aeron technology is cloud-native and designed for low-latency, high-throughput and fault tolerant trading system design, ensuring resiliency and low-latency messaging in a public or hybrid cloud set-up.
- We have been awarded the ‘Best use of Cloud’ award at the Risk Markets Technology Awards 2023 and the ‘Best Cloud-based trading environment’ at the TradingTech Insight awards 2021.
- We can be found on the Google Cloud and AWS Marketplaces.
One of Adaptive’s key areas of expertise is helping with UX / UI lifecycle automation from pre-trade, trade, middle office (as needed) to post-trade. Adaptive provides best practices and standardizations to capture scalable user experiences that address risk, oversight, reporting and settlement. Also check out our design accelerator, the UI Starter Kit, which helps us design and deliver truly inspiring user interfaces.
Adaptive assists large capital markets institutions on their automation transformation journey by building design systems and architecture that can quickly act on trades which need attention, a critical advantage with the move to T+1 settlement.
Sunsetting legacy tools and implementing a modern tech stack: Our extensive consulting experience enables us to navigate the complexities of legacy system analysis, mapping out a strategic approach for phased decommissioning. Our team gets into the detail of architecting implementation strategies that leverage state-of-the-art technologies, minimizing disruption. From comprehensive risk assessment to streamlined project management, we offer end-to-end solutions to replace outdated tools with innovative, future-ready solutions.
With testing having started as of 14 August 2023, the SEC is actively assessing the future feasibility of T+0, a world where trades clear the same day. In this potential future state, T+0 would require an ever more significant infrastructural and procedural overhaul.
Author - Hayley Gruber