‘Cracks to be revealed’ as T+1 testing begins today

Key phase of preparation for T+1 begins today as experts say testing will reveal the cracks; meanwhile DTCC has highlighted the need for a comprehensive and well-coordinated industry test to confirm readiness and ensure a successful implementation.

Testing for T+1 will commence from today and run until the implementation date at the end of May 2024.

The period is seen as critical for an industry still struggling to comprehend the far-reaching changes which will occur once the settlement cycle is shortened for US equities.

DTCC has highlighted how testing for T+1 has been recognised as a “critical success factor by the industry” from the start of the initiative, and therefore created the ability to test in T+1 and T+2 environments concurrently.

The industry infrastructures participating in the industry test will include DTCC’s subsidiaries ITP, NSCC and DTC as well as exchanges Cboe and Nasdaq, and the Options Clearing Corporation (OCC).

The industry T+1 test is designed to support full end-to-end testing, the DTCC noted.

“T+1 testing will not be mandated but is highly recommended,” the organisation stated. “Members can test T+1 changes as they see fit based on the changes made to their respective systems and processes.” 

In 2022, DTCC worked with the T+1 Industry Working Group (IWG) – which was comprised of representatives from all impacted market segments – to begin developing a T+1 test approach.

As part of those plans a schedule was drawn up with 21 cycles over a nine-month period, where DTCC will load Friday end of day position data into the test environment prior to each test cycle.

According to James Pike, head of business development, Taskize, the testing cycles will reveal any cracks in preparation work that need to be addressed ahead of May 2024: “Take one of the key early-stage components of T+1 prep – comparing settlement details to ensure that they meet the terms of the transaction. Changes to trade matching processes, including much tighter deadlines for the receipt of an asset managers trade instructions, not to mention the resolution of pre-trade problems, are of paramount importance.”  

Pike regards pre-matching of trades as one of the biggest obstacles to achieving T+1 settlement. “Without this, trades cannot move into the shortened settlement cycle and will likely miss the continuous net settlement process,” he says.

DTCC will reset the test environment at the end of each test cycle. More information can be found through the DTCC website, here.

In addition, Global Custodian continues to run a T+1 industry issues forum in partnership with the ValueExchange whereby participants can submit their questions for a panel of industry experts to address in the near future.

“While the full switchover is not until next May, this testing deadline brings T+1 operational preparations into sharp focus. Due to the need to have dollars available to settle trades of US securities, T+1 will undoubtedly be changing the way that many firms approach their FX execution and settlement,” said Alex Knight, head of sales and EMEA for Baton Systems. 

“For starters, it will lead to a situation where an increased proportion of trades are going to need to be settled outside of CLS, which will result in heightened settlement risk if not appropriately addressed. When also considering the fact that there is going to be less time to remediate breaks in a condensed settlement window, firms have to integrate alternative and highly automated forms of PvP FX settlement into their post-trade processes to ensure effective and safe settlement after the T+1 deadline.”