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Navigating the T+1 Transition: Is the Securities Industry Up to the Challenge?

Navigating the T+1 Transition: Is the Securities Industry Up to the Challenge?

T+1 settlement will be a watershed moment, marking a shift toward greater efficiency and reduced market risk.

By Rich Robinson, Chair, ISITC

Rich Robinson

As the financial industry inches closer to the May 2024 deadline for the T+1 settlement transition, a critical question looms large: Is the securities industry really prepared for this seismic shift? The move from the traditional T+2 (Trade Date plus Two days) to T+1 (Trade Date plus One day) settlement cycle is not just a minor operational tweak; it's a paradigm shift that demands a reevaluation of current practices and a significant upgrade in technology and process management.

Adapting to T+1 requires significant operational and technological enhancements. Firms must modernize their systems to handle the accelerated pace of transactions and data processing inherent in a T+1 framework. This involves not just adopting new technologies but also reassessing and reengineering existing workflows to ensure efficiency and accuracy under the compressed settlement cycle.

Global Coordination and Time Zone Challenges

The shift to T+1 poses substantial challenges in global coordination, especially for firms engaged in international securities trading. The compressed settlement cycle demands a higher level of synchronization across various markets and time zones. Firms must navigate the complexities of aligning their operations with different market hours and settlement practices worldwide.

This requires not only technological capability but also strategic planning and effective communication channels among global partners. Ensuring that all parties involved in a transaction are synchronized in terms of trade processing and settlement deadlines becomes crucial to avoid settlement delays and failures. Overcoming these challenges requires a collaborative effort and a deep understanding of the intricacies of each market, highlighting the importance of a global perspective in operational planning.

However, two concerns come into play here. One is for firms that are in time zones that effectively moves their processes to a near T+0 requirement, such as Asia-based firms in Australia, Japan, and elsewhere. Second is small and medium sized firms that may not have the resources necessary to implement needed technology solutions, hire off-hours staff, change funding models, or implement changes with 3rd party providers for things such as securities lending and FX services.

Cultural Shift and Training Needs

The move to T+1 settlement necessitates a significant cultural shift within financial organizations. This change goes beyond adapting to a faster settlement cycle; it involves cultivating a mindset that prioritizes efficiency, agility, and precision. Staff across all levels of the organization must be

trained not only in the technicalities of T+1 but also in adapting to a more dynamic and fast-paced working environment.

However, it is the interactions with counterparties, clients, and providers that remain the critical points of coordination. Unlike the broker-exchange process, the buy side flows involve many more participants, regulatory requirements, and fiduciary obligations that do not go away.

This cultural shift is essential for the successful implementation of T+1, as it influences how employees approach problem-solving, decision-making, and risk management in this new context. Fostering a culture that embraces continuous learning and adaptability will be key to navigating the challenges of T+1.

Risk of Increased Failed Trades

One of the immediate risks of an unprepared transition to T+1 is the potential increase in failed trades. The shortened settlement window offers less margin for error, demanding heightened accuracy and efficiency from firms. This risk of increased failed trades is a pressing concern, as it can lead to significant operational disruptions and financial losses. Firms need to be proactive in their approach, implementing robust systems and processes to minimize errors and ensuring they have contingency plans in place for rapid resolution of any issues that arise.

The potential for failed trades may disproportionally affect smaller and medium sized firms, and those in further time zones, however. Even larger players may find challenges depending on the makeup of their portfolios, trading strategies, funding models, and dependencies on other parties.

ISITC’s Role in Facilitating the T+1 Transition

Recognizing the challenges of this transition, ISITC has taken a leadership role. ISITC established a T+1 Task Force, comprised of more than 50 member firms, and coordinating with other industry associations, to tackle the multifaceted challenges of the transition. This Task Force focuses on identifying operational challenges, generating recommendations, and establishing best practices for sustainable solutions.

ISITC’s close collaboration with the SEC ensures that the guidance and recommendations provided are both timely and impactful. ISITC’s work extends to generating key resources and documentation for industry-wide use, which can be found on their T+1 market practices page.

Through robust educational programs, including webinars and conferences, ISITC has been actively equipping professionals with the necessary insights and tools to adapt and excel in a T+1 environment.

Ongoing Efforts and Future Advocacy

As we navigate this crucial transition, it's important to recognize that the shift to T+1 is part of a multi-year, global effort, encompassing diverse markets with their unique challenges and opportunities. This journey doesn't end with the 2024 deadline; it marks the beginning of an ongoing process of adaptation and refinement. In the years following the transition, continued advocacy and collaborative efforts will be essential to settle any emerging issues and ensure the industry's stability and efficiency.

This period will require sustained attention from ISITC and other industry bodies to monitor the impact of T+1 across different regions and market segments. It will be a time for proactive engagement, as we assess the practical outcomes of the transition and advocate for necessary adjustments and enhancements. The industry must remain vigilant and adaptable, ready to address any unforeseen challenges that arise and capitalize on new opportunities for growth and innovation.

The Way Forward

As the industry approaches the T+1 deadline, utilizing the resources and guidance provided by ISITC becomes increasingly vital. The organization's lead role in the industry is further reinforced by its ongoing research initiatives, such as the collaboration with The ValueExchange and DTCC. These efforts offer firms data-driven insights into global T+1 readiness and the areas requiring urgent attention.

In addition, ISITC's upcoming 30th Annual Securities Operations Summit and other events are critical platforms for continued learning and discussion. Engagement in these forums is crucial for firms to stay informed and align their transition strategies with industry best practices.

Conclusion

The transition to T+1 settlement is a watershed moment for the securities industry, marking a shift towards greater efficiency and reduced market risk. However, this transition is not without its challenges. The collective effort led by ISITC, in conjunction with other industry bodies and regulatory agencies, is creating a roadmap for identifying key challenges and working on shared solutions to help mitigate them. By leveraging the resources and expertise provided, firms can navigate this transition more effectively, turning the challenges of T+1 into opportunities for innovation and growth in the securities market.

Embracing this change requires a collaborative and forward-thinking approach. The industry must commit to continuous learning, adaptability, and strategic planning to ensure a smooth and successful transition to this new operational paradigm. Industry and regulators must together work to analyze impacts, especially those that may not be readily apparent from just looking at failed trades and targeted efficiencies. As the deadline nears, the readiness and proactive engagement of every market participant will be crucial in shaping the future of securities trading.

About the Author:

Rich Robinson is a senior executive and author with over 30 years of experience in the financial industry, across operations and technology functions. He has held leadership positions throughout the front, mid and back offices at major global custodian banks, brokerages, and industry utilities, leading transformative projects in data, operations workflow, and messaging. Rich is an active participant and Chairperson of key working groups related to international data and messaging standards.

His book, “Understanding Financial Services Through Linguistics” was published by Business Expert Press in 2021 and explores how to improve the creation and application of data, standards, and regulation in financial services through an applied linguistics lens.

Rich is Chief Strategist, Open Data and Standards at Bloomberg LP. He works globally with regulators, legislators, and industry leaders on addressing data and standards issues to create more efficient and transparent markets. Bloomberg supports two international open data standards, FIGI and LEI, and Rich focuses on helping firms and regulators leverage these standards to achieve better interoperability and create efficiencies across the industry.

He is currently Chair of ISITC, co-Vice Convenor of the ISO20022 RMG, and Sherpa for the APFF Financial Market Infrastructure Workstream. He is a regular speaker at conferences and has been published in the Journal of Securities Operations and Custody, the MDPI journal “Standards”, Waters, and Inside Reference Data, among other global financial services publications.

He holds an MBA in Organizational Behavior and Information Technology from NYU’s Stern School of Business and a B.S. in Industrial Management from Carnegie Mellon University.

 

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