What is T+1?
Compression of settlement periods is not a new phenomenon and has periodically taken place for the last few decades, with most major markets operating on a T+2 basis for exchange traded securities. Up until 1993 the US was T+5, then moved to T+3 until 2017, when the move to T+2 was implemented. The move to T+1 represents a clear drive in the industry towards automation.
The US will move to T+1 settlement in less than 12 months (by May 28, 2024), and we expect the rest of the world will follow shortly after with the UK already setting up a taskforce to explore the move and the AFME (Association for Financial Markets in Europe) announcing its work across European markets. There are plenty of implications for asset managers and asset servicers to consider before moving to T+1.
The move to T+1 should benefit both asset and wealth managers and in turn, their end clients
The key benefits include:
- Reduction in risks linked to late settlement. Less time between the accounting and the actual settlement of transactions taking place reduces counterparty risk exposure as well as market and liquidity risk. This is particularly valuable during periods of market volatility (as is currently experienced) and will greatly benefit retail investors.
- Reduced liquidity, margin and collateral requirements. The very nature of settling trades within a quicker time frame will reduce the extent of liquidity, margin and collateral requirements for asset managers.
- Improved overall operational efficiency. Shorter settlement cycles will help investors gain quicker access to their funds and necessitate greater operational efficiency within asset managers, asset servicers and vendors including any means to reduce operational friction especially process automation.
- Alignment of treasuries and mutual fund settlement. Treasury bills and bonds as well as mutual fund shares currently settle on T+1. This brings underlying securities in alignment, reducing risk and improving cash management.
T+1 will no doubt carry near-term challenges, which asset managers need to consider
These include:
- Increase risk of settlement fails. Reducing the settlement timing compresses the time for receiving a sale notification and issuing a recall, and the opportunity to complete security lending transactions to cover short periods. These increase the risk of settlement fails.
- Challenges with different settlement timelines. FX trades typically settle on T+2. Managing this with a USD funded trade, which requires T+1, may result in increased pre-funding to trade US equities and will have a more acute impact on foreign investors/ funds. Furthermore, managers in EMEA and APAC will have a limited window to manage FX linked to equity trading, which creates further operational pressures.
- Compression on Middle Office processes. Dependencies on batch cycles and vendor data/ services will need to be thoroughly reviewed to ensure firms can achieve same-day affirmation by 9pm (ET) as set by the DTCC. Considerations for international cut-offs and deadlines will need to be incorporated, whilst client agreements such as SLAs and KPIs will need updating. For Corporate Actions specifically, which are notoriously manual and often dependent on batch processes, compression on position management and entitlement calculations increases the risk of errors and reduces the time to correct errors.
What are the key challenges for asset managers in implementing this change?
Alpha has identified the ‘3 Ts’:
- Technology. A robust technology architecture and infrastructure will be crucial to supporting the associated process changes. Employing a technology stack/ platform that promotes automation, flexibility and has minimal reliance on legacy systems and EUCs (‘End User Computing’) is key. It is imperative to highlight that APAC and EMEA-based clients may need to make significant changes to their infrastructure to accommodate the time-zone differences with the US.
- Time. The lead time to implement this change is more aggressive than the move to T+2 – there is less than 12 months to implement the required changes to accommodate T+1. Asset managers and asset servicers should have Change programs established as well as a client impact communication strategy. Critically, the programs need to be suitably resourced and governed, with an achievable delivery plan.
- Testing. Coordinated external end-to-end testing, with multiple vendors and service providers with differing test windows is a key challenge and requires clear planning and detailed management. A useful resource for testing is provided by DTCC here.
How Can Alpha FMC support asset managers with this change?
We have identified three possible routes:
- Cash Management Process Assessment. T+1 Settlement naturally impacts liquidity and cash management function and Alpha has been working with clients to proactively assess their cash management change requirements. Alpha provides a detailed evaluation of the end-to-end cash management function, critically identifying key pain points, providing solution recommendations, with an actionable roadmap to implement these changes.
- Operating Model and Technology Review & Design. The move to T+1 will require increasingly efficient trade processing and that of associated operations – adding to the unequivocal trend towards automation. This presents a prime opportunity for asset managers and asset servicers to review their operating models and technology architecture. Alpha are experts in operating model reviews and designing strategic target states that deliver ‘best in bread’ processes, and technology and data architectures to suit an asset manager’s specific requirements.
- Implementation Partnerships. Alpha has worked with the world’s leading asset managers, asset servicers and technology vendors in implementing significant transformations. In the case of T+1, Alpha can add huge value in partnering with firms to deliver significant change – such as designing, planning and implementing a strategic operating model with a new technology platform, which amongst other benefits, will help ensure effective management of T+1 settlement.
The move in the US to trade settlement on a T+1 basis is a natural progression to improved efficiency in trade processing, and the rest of the world is likely to follow. This change will certainly bring benefits but carries its own challenges. Asset managers and asset services that identify these at the outset and are bold enough to make measured operating model and technology improvements will not only carveout a competitive advantage but will also deliver wider benefits across its investment operations. Alpha is very much on hand to support clients on this journey and as a byproduct, help position them for the inevitable move to T+0 in the future.
If you would like to get in touch please reach out here, for a specific EU contact please reach out to Samuel Denton-Thompson here
About the Authors
Sean Kennedy
Associate Director
Sean is an Associate Director at Alpha leading work across Alpha's Global Operations Practice. With over 15 years experience navigating and driving change at one of the world's largest asset managers. He brings hands-on experience and a depth of knowledge across Global Investment Operations, Risk, and Regulatory compliance. Sean is also a frequent industry speaker and has held various senior leadership roles across US and Europe.
Sam Morell
Associate Director
Sam is an Associate Director at Alpha and a key member of Alpha’s Operations Practice. He has a wealth of experience in delivering complex Transformation Programmes with specific expertise in Outsourcing transitions and M&A Op Model consolidations. Sam has worked on both the Asset Manager and Provider side and has a firm understanding of ‘what it takes’ to deliver to plan, whilst fostering a strong working relationship between the parties to the benefit of the new BAU partnership.
Mark McLean
Senior Manager
Mark McLean is a Senior Manager with over 17 years of experience managing middle and back-office operation and technology projects. While at Alpha, Mark has been involved in strategic assessments that help define recommendations for outsourcing middle-office operation activities for clients. Prior to Alpha, Mark spent 10+ years working for two different software vendors managing and implementing large scale investment accounting and data management projects across a full range of asset classes including equities, fixed income, bank loans, and a wide range of derivative products.