The acceleration to T+1, where are we now?

Industry experts from DTCC, Loomis Sayles and Morgan Stanley discuss the acceleration of settlement cycles to T+1 and how firms can prepare.

The Securities Industry and Financial Markets Association (SIFMA), the Investment Company Institute (ICI), and The Depository Trust & Clearing Corporation (DTCC) are working together to reduce the T+2 settlement cycle in the United States to T+1 by the first half of 2024.

In a panel discussion hosted by DTCC (‘Accelerating to T+1: Impact on institutional trade flows’), the firm noted that the time is right to explore a new approach to post-trade processing, suggesting that the move could create cost and balance sheet efficiencies while also positioning the US as one of the most broad and efficient markets in the world.

Carolyn Kostelny, managing director for DTCC’s consulting services, highlighted four potential benefits attributed to the move to T+1: “The first is a reduction in risks that increase margin requirements. Second, we have heard that T+1 could reduce not only operational risks but also systemic risk across the industry.

“Thirdly, we have heard from clients that T+1 could reduce the number of unsettled positions and thus reduce the number of resources needed to manage that risk, which then results in a reduction in costs for firms. Finally, DTCC’s central position within the securities space can provide them with overall greater efficiency in regard to T+1.”

To manage counterparty default risk in the system, an average of more than $13.4 billion is held in margin on a daily basis, according to data from DTCC. Reducing the settlement cycle to T+1 could aid in achieving a balance between risk-based margining and reducing procyclical impacts.

Speaking on what the buy- and sell-side should be doing to get ready for the transition to T+1, Steven Chittenden, VP and director of investment operations at Loomis Sayles, said: “We need to look at the technology that will be required to get to T+1. Firms should start to look at their internal processes now.

“There’s money to be spent and there’s things to do, so if you haven’t got a budget yet, get one soon and try to rally your troops and figure out what you need to do and work with your vendors. I encourage firms to start moving on it now – two years flies by fast.”

In a recent white paper, DTCC found that several firms are already prepared to start revising their processes to align with T+1 settlement. Market players acknowledge the benefits associated with the acceleration of settlement: including the reduction of market risk and margin requirements due to shortened settlement times, which in turn allow firms to use their resources in different ways.

“Clients can start asking some critical questions internally. For example, you should be asking, what processes should be automated or what controls need to be updated so that they remain effective after the transition to T+1?” added Kostelny.

“What technology stack changes need to be implemented and are your firm’s current management, information, governance and escalation frameworks appropriate? Once you answer those questions, putting a bespoke programme in place to understand how you can best effectuate any necessary changes will be really key.”

Accelerating the settlement cycle has the potential to change current market structure, especially given that it would have upstream and downstream effects on separate parts of the market structure such as derivatives, securities lending, cash borrowing, foreign exchange and collateral processing.

In order to have a successful transition to T+1, market players should be prepared to align and implement the necessary operational and business changes alongside engagement from regulators.

“This does impact you. If you don’t think it does, you probably haven’t looked close enough at your processes,” commented Mike Fiscella, managing director of shared services and banking operations at Morgan Stanley.

“You need to get your budget in place and really make sure you have the right programme and support around you. Also, in terms of resilience, this just can’t be a model that works on sunny days. Think back to March 2020, when the industry saw record volumes day on day – it has to work in that kind of world and even worse.”

Although the goal to accelerate settlement cycles in 2024 may seem far off, the time to prepare is now. Shortening the settlement cycle will decrease industry risks and costs while building on the benefits gained from the successful transition to T+2 achieved in 2017.

“The solutions are there, it’s just a matter of taking that coordinated response and working together as an industry to achieve this goal,” said Matt Stauffer, managing director, head of institutional trade processing at DTCC.