BNY Mellon has conducted an analysis of its US custody base to show that roughly a third of trades settled by DTCC may face issues in preparation for the new T+1 settlement cycle reduction in their current workflow format.
The data collected in November 2023 and published in BNY Mellon’s Alta report found that 25% of client transactions need to adjust their workflows to meet the new settlement cut-offs. Meanwhile, another 9% would need “significant operating model changes” to meet the new deadlines which come into force on 28 May in the US.
Only two-thirds of client trades BNY Mellon tracked currently meet the future deadlines.
Speaking to sister publication, Global Custodian, Adam Watson, head of commercial product, custody services at BNY Mellon, said: “This is a look at the efficiency of us and our clients’ operating models. We’ve got all these analytics and we look at KPIs whether it be affirmation rates, settlement rates, failure rates, straight through processing, manual touch points, it’s a wealth the data.”
Watson then explained that when digging further into the data, the US has a high success rate as expected, however while the consensus within the industry is that Asia is probably the furthest behind in being ready – Europe actually emerged as lagging the further behind out of the three regions.
On the client side, he explained that alternatives clients and asset managers are “by and large there” while the biggest lag is intermediary and insurance clients, who are acting on behalf of an underlying client.
“When I look at the US market, my straight through processing rate is already in the high 99% range. We don’t have an automation problem in the US,” Watson explained.
“I think the stat is more indicative of people relying on that extra day to get through any exceptional issues. Make sure securities inventory is where it needs to be, make sure you know what lending recalls need to be done. There is reliance on ancillary things that happen later in the trade lifecycle to make sure trades settle on time.
“We will get to a higher affirmation rate and we are already at a high straight through processing rate, but its those ancillary things, we really need to bring the isolation of exceptions as close to the point of execution as possible through real time data that allows clients to know OK when my PM trades this security – is there a high likelihood of settlement or do we expect a problem?
“When you start layering cool things around predictive analytics, then we can start using historic look backs to say ‘hey, last time these things happened, this was the outcome’. We can start looking at patterns to highlight potential issues earlier and resolve before they become problems, but it starts with making sure that clients start to ingest that data significantly earlier in the in the workflow so that they’re ready for settlement.
“I’m not surprised by the stat [30% of trades would face issues] but the stat isn’t to me indicative of an affirmation confirmation issue or a straight through processing problem. It’s more of a people are relying on that extra day, which in five months won’t exist anymore.”
While it is no secret that the need for preparation and changes in systems and processes are essential for the shift to T+1 in the US – for market participants across the world – research such as this from BNY Mellon emphasises the cost of doing nothing.
Trade fails have become an increasing issue in recent years, and a lack of planning for the US shift to T+1 for equities would only exacerbate this issue.