The journey of US Settlements has progressed significantly over the last couple of decades - from T+3 in 2008, to T+2 in 2017. It has received a further thrust with recent recommendation of the Depository Trust & Clearing Corporation (DTCC) for moving to
T+1, by H1 2024.
This is a logical continuation of accelerating settlements as it brings many benefits, including: efficiency in trade settlements, reduction in liquidity usage and volatility, reduced market risks, lower margin requirements and enhanced capital / operational
efficiencies. Yet – there will be challenges, primarily around likely increase in trade settlement failures due to delays in post-trade processes. These will have less time to complete and address any mismatch issues. Resultantly, intraday settlements will
increase at the CSD, which is less efficient than the overnight batch one that usually uses advanced settlement optimisation algorithms.
Therefore, unlike the moves to T+3 and T+2, moving to T+1 is significantly more challenging for firms to implement as there will now be no room for handover to daily manual processes – it all needs to be performed within a timeframe that only allows for
one overnight process.
To make this move to T+1 work, at Cognizant we have identified five key areas of fundamental change firms will need to undertake to get ready. Only addressing all these points together would allow firms to truly be ready for the change and position themselves
to deal with its consequences. We outline these five below.
1. Central exception management and dynamically optimized workflows will be key to meet the new compressed timelines.
The first step in the transformation process would be to create an overarching orchestration layer (Single pane workflow) creating a central exception management workflow from the underlying settlement platforms and market messaging. Prioritisation, suggested
actions, interoperability with other systems and communication with the market and risk management dashboarding are incorporated into the solution. Full audit trail and reg reporting completeness.
2. Data quality will become paramount to achieve the settlement efficiency required under T+1.
Historically, majority of settlement fails are due to poor static data. With accelerated timelines, the window to address trade detail mismatches narrows significantly, meaning there will likely be an increased incidence of settlement fails without a fundamental
focus on improving data quality.
Additionally, another critical aspect will be ensuring improved data linkages, such as linkages into the stock record and stock loan / funding groups. Market rules and referential data could then potentially be used to build a picture of prioritisation with
the help of AI and ML allowing for the construction of suggested actions for users or even automatically create market instructions – all helping to increase settlement efficiency.
3. System readiness will form of one of key challenges for T+1 readiness.
To meet the shortened timeframe, there will be increased pressure on automation of key steps of the settlement lifecycle, including end-to-end integration of core applications and resilient straight through processing to third parties. Systems, applications
and integration with third parties will need to be reviewed for their ability to deal with the end-to-end settlements process by end of next working day and - even more importantly - their adaptiveness to minimising and/or removing manual interventions. The
ability to incorporate AI and Machine Learning will prove crucial in achieving this.
4. Business models will need to be reviewed as firms adapt to the consequences of T+1.
Many business models currently rely on settlement cycles taking longer than T+1. These will be severely impacted as a result of the move. For example, securities lending will no longer be as profitable as the need diminishes. Equally, the cost of failed
trades will go up, impacting high volume, thin margin business models. On the other hand however, new opportunities will arise, such as rescued margin and risk charges.
5. Finally, operating models will be significantly impacted.
The proposed T+1 changes will inevitably impact the way firms currently operate. For instance, how firms execute client orders that involve an FX or securities lending leg – as the timeframe for these is longer than T+1, meaning that the deal can’t be executed
straight away. Based on these changes, it is clear that the consequences of moving to a T+1 settlement timeline is more involved than just a market technicality – and significantly more impactful than previous switches to T+3 and T+2 were. In fact, based on
the depth of the needed changes, at Cognizant, we recommend firms to plan for T+0 to get ready for T+1.
To truly address the impacts in a holistic way, firms will need to review their workflows, data, systems, business models and operating models – all to granular levels including full process mapping. They would also require to choose a partner that understands
the full depth of implications – from strategy and advisory down to delivery and operating. Cognizant is such a partner, combining true advisory consulting in Governance, Risk and Compliance with technology delivery, implementation and operations.