No automation, no T+1

A recent webinar by The Value Exchange confirmed these positive outcomes reflecting industry experience and research. 

The success of T+1 settlement is due to the collaborative efforts of the SEC, SIFMA, and DTCC. Clear deadlines, proactive preparation, and widespread automation were crucial. 

Disparity in outcomes across the industry

While we celebrate the industry’s overall success, it is important to acknowledge the disparity in outcomes among market participants. Larger broker-dealers and custodians have notably excelled in the T+1 transition, leveraging their substantial investments in automation, existing robust operating models, and expertise in managing large-scale regulatory change.

Conversely, asset managers, institutional investors, and other market participants have faced greater challenges. Their struggles stem from less integration with brokers and custodians, higher adoption costs, and the burden of legacy systems and infrastructure. This discrepancy highlights the varying degrees of readiness and resource availability across the industry.

Achieving T+1 in North America has increased operational costs, particularly due to the need for more resources to support extended working hours under new operating models. The automation gap remains significant, especially among participants trading in more complex securities. 

Lessons for Europe and Asia

In the US, a 20% increase in automation, as highlighted by The Value Exchange’s research, along with a centralized ecosystem, has enabled a relatively smooth T+1 implementation. This success offers valuable insights for other regions. However, regulators and market participants in the UK, Europe, and Asia planning similar timelines must be aware of additional challenges.

The challenges in Europe and Asia are already evident. Much of the processing occurs outside local business hours, requiring extended working hours to meet custodian deadlines. Legacy processes for data integration cause delays in reconciliation and allocation processing, undermining confidence. Many of these legacy systems were designed during the T+5 era, featuring inefficient communication tools and manual controls that hinder the adoption of new market initiatives and real-time data transfer.

This situation underscores the crucial role of automation in achieving operational efficiency. Without automation, reducing team size is impossible, and the need for manual exception management due to poor processes and human error will remain high or even increase, driving up costs per trade. The UK’s Accelerated Settlement Taskforce report emphasizes that the goal is increased automation, not headcount. Relying heavily on the specific expertise of internal teams, especially in smaller firms, is unsustainable from a cost, resourcing, or risk perspective.

Jurisdictions outside North America face more complex considerations due to their decentralized nature, larger CSD networks, and varied currency spreads. This complexity adds layers of challenges that must be navigated to achieve successful T+1 implementation. 

Where can automation have the most impact?

The industry recognizes the need for increased automation to improve processes, ensure data integrity, and enhance governance within a T+1 framework. While the ultimate goal is end-to-end automation, there are key areas that should be prioritized initially:

Fund onboarding 

Much of the data required for fund onboarding is unstructured, making processes challenging. This slows down the process, increases the risk of human error, and delays trading. Automating this process can make it faster, more accurate, and integrated, reducing risks and improving efficiency.

Standing settlement instructions (SSIs) 

SSIs are crucial for achieving the speed, accuracy, and efficiency needed for successful trade settlements in a T+1 environment. They ensure all parties have the correct information, facilitating smoother and more reliable settlements. Increased standardization and automation of SSIs will benefit the entire market.

Allocations

Data for allocation splits often resides in legacy systems and is exchanged via email and spreadsheets, which is not ideal for a T+1 model. Automating this function can make it more intuitive, faster, accurate, and integrated.

Affirmations and confirmations

The success of T+1 settlement depends on agreeing on trade fundamentals with enough time to address discrepancies. Automating the capture of trade information from any source system ensures accurate pre-settlement matching, which is essential for managing risks.

Reconciliations

In a T+1 environment, capturing and validating trade data within the organization is crucial for successful settlement. Automating reconciliations from batch cycles to near real-time and using business logic to manage exceptions faster will bring operational benefits and reduce fail rates.

Learning from North America's T+1 implementation

The successful implementation of T+1 settlement in North America serves as a valuable learning opportunity for other jurisdictions looking to follow suit. However, regulators and market participants in Europe, the UK, and Asia will need to be acutely aware of the additional complexities they may face due to more decentralized financial ecosystems, larger CSD networks, and varied currency spreads.  

Achieving operational efficiency through increased automation will be critical to overcoming these challenges and reaping the benefits of shortened settlement cycles. By prioritizing automation in key areas like fund onboarding, standing settlement instructions, allocations, affirmations, and reconciliations, the industry can drive down costs, reduce risks, and position itself for long-term success in the T+1 era. To learn more about how firms are automating these processes, schedule a session with our team.

As the global financial landscape continues to evolve, the lessons from North America's T+1 transition will undoubtedly inform and guide the way forward for other markets.