Readiness for T+1 settlement varies from firm to firm. Industry feedback suggests that a number have T+1 projects under way, while a proportion have at least begun initiatives. Others, perhaps surprisingly, have not yet acted at all. Some – typically large – institutions are well placed to cope, with sophisticated systems in use, while others – often smaller organizations – still rely on manual processes and legacy systems.
In deciding how to meet the demands of T+1, financial firms face a choice. Should they fall back on the traditional route of hiring more people? Or adopt higher levels of automation? Given that an eventual transition to T+0 settlement is likely to happen, introducing greater automation is surely the best route forward. Quite simply, in the future, human operatives will be unable to cope with processing speeds and the pace of change. Feedback from market participants suggests that while some companies will carry out in-house projects, plenty of others are looking to partner.
Greater standardization will be a necessity if the industry is to achieve high levels of automation. Understandably, industry attention is sharply focused on the looming T+1 implementation deadline. Yet the shift to a T+1 settlement cycle also presents financial institutions with a golden opportunity to improve the efficiency of their operations.
Cash and liquidity management
T+1 settlement will push firms to pay for and deliver securities faster than at present, which is likely to increase intraday liquidity demand. To manage the heightened demand for liquidity, treasuries may need to use more short-term funding, such as repos and money market funds. These instruments can be volatile, and if short-term rates rise, or compressed settlement times create greater competition for the same funding sources, costs will increase. The move to T+1 will affect not only US banks, but all banks trading securities covered by the SEC ruling. The impact will not just be on direct currency funding but on cross-currency funding. The industry could start to change how it settles cash flow, too, for example, moving to real-time gross settlement.
Collateral management
The introduction of T+1 settlement is likely to reduce the credit, market and liquidity risk associated with unsettled trades. In addition, it may help bring down the amount of initial margin that financial institutions need to post. Some banks have fully automated their collateral management processes, while others continue to manage certain elements on spreadsheets. The picture varies across the industry, and flexible technology partners can help support banks’ individual requirements. Automation, while desirable, is often difficult for organizations to achieve, particularly where IT systems do not interact seamlessly.
Corporate actions
The move to T+1 settlement will mean that any corporate actions affecting instrument static data (and thus impacting trade matching), will need to be processed within 24 hours of trade execution to avoid failed settlements. Organizations dependent on custodian data and spreadsheets to handle events may struggle. Time zone differences and any event-related FX considerations will compound difficulties further. With settlement discipline an increasingly important regulatory focus, pressure to avoid errors is rising. The need for greater speed will also affect voluntary events – especially in areas such as prime brokerage and securities lending.