Data-driven solutions to the T+1 challenge

Data-driven solutions to the T+1 challenge

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By Martijn Groot, VP Marketing and Strategy, Alveo

On February 15 2023, the Securities and Exchange Commission in the United States adopted a rule amendment to shorten the standard settlement cycle for most routine securities trades from two business days after the trade date to one business day after the trade date (or from "T+2" to "T+1" in common parlance). This will take effect on May 28 2024.

Reducing the settlement time will make financial markets more efficient and will reduce the risk that is inherent in the process. More specifically, it reduces credit, operational and liquidity risk. Firms do not have to put as much margin in clearing houses; collateral requirements will be reduced because exposures will be lower.

However, the change, which is likely to be replicated in Europe, will mean financial services firms will have to run their post-trade operations under much tighter time constraints due to the shorter window for settlement. Business processes and integration between different systems and counterparties need to become much tighter as there won’t be much of a time buffer for any manual intervention, reconciliation or rework.

In particular, the reference data, including that on legal entities, financial products, corporate actions and standing settlement instructions that underpins the settlement process, needs to be 100% accurate, easily accessible and used consistently by different parties and applications. There is likely to be too little time to rectify any significant errors. meaning that mistakes can be costlier, putting greater onus on data management, data quality and common access to the right information.

Finding a way forward

Given the pending deadline for Europe to follow North America’s lead, financial services firms need to start preparing themselves straightaway for the rule change. Running operations on  IT infrastructures that often date back to the 1990s or early 2000s will be a massive liability.

When it comes to the European securities markets, there are a raft of challenges that financial services firms are likely to have to deal with should the settlement cycle also be reduced to T+1. On the one hand, the securities market is generally more complex and more fragmented across the continent than it is in North America. There are different Central Securities Depositories unlike the centralised US situation. In addition complexities arise, if firms have a foreign exchange components to a trade in place, because these markets are still largely on T+2 settlement terms.

To best prepare themselves for T+1, asset managers and banks need to ensure they have the right business processes in place, including the ability to post collateral with their clearing house and to process corporate actions quickly. But, secondly, they also need to implement the right applications and data services to support this model.

Progress has been made in this area over recent years, with a range of new data and service offerings being rolled out, including services for corporate actions and security master information. We have also seen financial services companies looking to outsource their approach to data management, with some migrating over to a Data-as-a-Service approach to cover areas like the terms and conditions of securities, which will help post-trade operations on a firm data foundation.

Indeed, we are seeing an increasing move by firms towards this kind of approach as more and more organisations realise not only that trade breaks are costly but also that in the T+1 scenario, there is very little time to address them, and therefore the onus on automation and data quality is increased.

One reason for the increasing adoption of Data-as-a-Service is that it provides a ‘halfway house’ for financial services firms between on the one hand keeping their technology fully in-house, and on the other, completely outsourcing their back office. Data-as-a-Service offers financial services firms the ‘best of both worlds. Firms effectively outsource part of the foundational layers that provide security master, legal entity information and standing settlement instructions (SSI).

Using Data-as-a-Service will mean benefiting from a proven technology platform for data collection and validation – providing the data accuracy required in a T+1 world. Data-as-a-Service providers will operate the service for many other clients which means benefiting from the wisdom of the crowd.

Looking ahead

In conclusion, the transition to a T+1 settlement cycle presents both opportunities and challenges for financial services firms. Embracing modernisation efforts, data-as-a-service models, and automation will be essential to navigate the evolving settlement landscape successfully. By seizing these opportunities, firms can enhance efficiency, mitigate risks and maintain a competitive edge in the market.

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