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T+1 Accelerated Settlement: Key Factors and Next Steps for Adoption

The timeline for T+1 adoption released by the DTCC (Depository Trust & Clearing Corporation) and lessons learned from previous efforts to reduce settlement periods highlight the key factors necessary for a successful transition at an industry level and the next steps firms must take.

DTCC T+1 Program Proposal Overview

The Depository Trust & Clearing Corporation’s (DTCC) recently released white paper, Advancing Together: Leading the Industry to Accelerated Settlement, outlines a two-year, industry-wide plan to adopt T+1. The adoption of T+1 would mean shortening the settlement cycle from two business days to one for U.S. equities.

Key benefits including increased efficiency and reduction in margin risk and volatility have supported the push for a shorter settlement cycle as outlined in our previous article on T+1. The combination of increased market volatility and value and trading limits due to the recent activity around stocks like GameStop (NYSE: GME) has caused capital requirements to support margin to increase. With the increase, costs also increase due to more liquidity needs. This has created an incentive for the industry to further decrease the time to settlement. [1] The previous shifts to T+3 and T+2 set the blueprints for how the migration should be executed.

T+5 to T+1: Transaction Settlement in History

Key Factors of T+1 Development

With T+2 settlement, the securities industry has several critical processes which still largely happen at end of day on trade date or in an overnight batch cycle process. T+1 is used to clean up exceptions, breaks, book as-of trades, and much more, leading to high levels of settlement success on T+2.

For T+1 settlement to be successful the entire industry will need to get on board, meaning all processes need to move to real-time at an individual firm level, with breaks and cleanup happening on trade date, or worst case, before the market opens on T+1. With a move to T+1 settlement, failure to achieve complete and correct processing of all trades on trade date would mean that the firm would be buried in fails and other trade breaks.

Critical Settlement Processes Include:

  • Purchase and sales (P&S) processing of street-side breaks and unmatched trades.
  • Proper allocation to trade subaccounts by asset managers and hedge funds, including the accurate settlement instructions, matching of confirmed trades, and allocated trades with the broker-dealer.
  • Trade give-ups by introducing brokers to clearing firms and hedge funds to prime brokers, which typically happen after market close on trade date, with missing or unmatched trades resulting in P&S breaks which need to be cleaned up on T+1.

Specific considerations

  • With the move to T+1, numerous processes need to be examined at industry- and firm-level to ensure they can meet the overriding objective of complete and correct processing on trade date with all breaks and exceptions cleaned up on trade date, or worst case, before market opening on T+1.
  • Margin account processing
  • Maintenance of accurate and up-to-date Standing Settlement Instructions
  • Reference data set up
  • Voluntary and mandatory corporate actions
  • ETF creation redemption
  • Structured products, convertible bonds and convertible preferred conversions
  • Equity options exercise

T+1 Implementation Next Steps for Firms

Per the Securities Industry Financial Markets Association’s (SIFMA) May 4th press release on T+1, discussions with SIFMA members on the necessary steps to adopt T+1 have been ongoing since late last year and are expected to be cemented by Q3 2021, with a more definitive timeline to follow soon thereafter. [2] In preparation for the implementation, firms will be expected to be prepared and hit the ground running. A few critical actions that will establish a foundation of awareness include, establishing governance, a program management office (PMO), and conducting an internal impact assessment to align regulatory, business, and strategic objectives.

Roadmap to T+1

T+1 DTCC Proposed Timeline

Align firms' settlement migration strategy with the proposed DTCC timeline around the move to T+1

  • Q1 2021: DTCC completed prototype development for the Project Ion settlement system, which provides a T+1 environment for the industry on a digital platform using distributed ledger technology (DLT) and other emerging technologies. Industry testing started shortly after the prototype is completed.
  • H2 2022: DTCC to begin transitioning to an enhanced settlement model that more closely integrates processes from DTCC’s equities clearing and settlement subsidiaries, NSCC and DTC. Studies have shown an integrated settlement model could provide an 11% reduction in the volatility component of NSCC margin.
  • H2 2023: DTCC proposes the U.S. settlement cycle to officially move to T+1, with market participation and regulator alignment.
  • H1 2025: DVP (delivery-vs-payment) model implemented to day cycle as in addition to the night cycle as it was in 2022.

 

Governance Framework

Align Program Objectives with New Regulations

  • Create a governance framework which establishes responsible parties for interaction within the firm and with regulators, decision-making and accountability hierarchy and clear rules and systems to be followed by the entire organization.
  • Relevant regulatory bodies, including the Securities and Exchange Commission (SEC), will need to be engaged to implement the T+1 initiative to ensure transparency and clear guidance across the business lines on the key controls and requirements to be incorporated into firms’ policies and procedures.    

 

Project Management Office

Establish T+1 Transition Program

  • Develop project plans for all major programs and projects and implemented status reporting criteria for all levels (i.e., projects, minor development documents, and production support)
  • Ensure internal migration plan adheres to the industry timeline released by the DTCC
  • Create a communication plan that resulted in regular reporting of status / next steps to all impacted parties within the project life cycle
  • Formalize procedures for gathering business requirements, facilitating their review, and ensuring proper sign-off prior to implementation of the solution
  • Managing issues and action items, determining resourcing needs, standardizing management reporting, and tracking program and project expenses

 

Impact Assessment

Compare the current state to the requirements needed to facilitate a move to T+1

  • Conduct a current state assessment by creating and distributing a questionnaire for each line of business to highlight areas requiring attention.
  • Assess each line of business and draft process flow; perform an initial gap analysis to discern reports requiring automation, identify where additional resources, third-party vendors, and operational enhancements are required.
  • Engage with industry vendors to ensure impact analysis and remediation processes are conducted for the systems from their end.
  • Assess whether the current technology stack can operate on a real-time basis and implement needed system changes.
  • Review and challenge all impacted business lines to identify all upstream and downstream dependencies.
  • Gauge internally developed roadmap against pertinent regulatory bodies’ timelines to measure progress and preparedness.
  • Broker-dealers will need to assess the impact of potential increases in settlement and reconciliation issues on their regulatory capital (15c3-1) and customer segregation (15c3-3) computations.

Sia Partners Capabilities

Sia Partners has extensive experience and a thorough end-to-end understanding of the US Securities Industry, from the Institutional Broker-Dealer, Wealth Management, Asset Management, Clearing Broker, Hedge Fund, and Prime Broker perspectives.

Our strong credentials and experience with major banks and broker-dealers on the T+2 implementation in 2015-17 would provide your firm with in-depth analysis, planning, and execution of the many challenges ahead over the next 2 years in implementing T+1.

Sia Partners has strong experience with technologies including blockchain, cryptocurrencies, and smart contracts. Our knowledge and expertise in working with these technologies span all stages of a product cycle including development, deployment, and testing.

Our experience includes delivering solutions on various open source technologies including Hyperledger Fabric, Ethereum, Corda, and Tezos, and consists of both backend and UI development.

Sia Partners has achieved considerable knowledge of the financial services space and their innovations through utilizing blockchain by working extensively with US banks, foreign banks, central banks, startups regulators, and stock exchanges. We have a successful history constructing proposals on technical architecture enhancement particular to the bank’s goals and needs.

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