The markets have been tumultuous these last few years, and this whirlwind of volatility has hastened the need for change, driving the upcoming move to T+1 settlement. Equities, corporate debt, and unit investment trusts in the U.S. will move to a T+1 cycle on May 28, 2024. Canada is following suit; they intend to align the timing of a move to T+1 with the United States. No other global markets plan to make the change at this time, although some are considering it for the future.
The switch to T+1 is expected to result in multiple benefits. A shorter window between trade and settlement date equates to lower market and counterparty risk. This, in turn, means margin requirements should decrease, as they’re correlated to the risks of a trade. Liquidity will increase for investors and in the overall market. And for mutual funds, settlement cycle alignment between fund trades and underlying security trades will help with cash management.
Logistical challenges, of course, will also accompany the change. Here are a few key considerations to begin planning for now:
- Reviews of tech stacks, including upstream and downstream data flows, are needed to assess any changes required to accommodate T+1 settlement (e.g., removal of any T+2 hard coding).
- Post-trade affirmation will need to happen earlier, with a new deadline of 9 pm ET on the trade date.
- DTCC advises that allocations should be performed and communicated on the trade date by 7 pm ET to meet the 9 pm ET affirmation cutoff.
- Changes to the deadlines in the trade cycle will affect how global service models are staffed.
- We may see more breaks with corporate actions occurring on in-flight trades; timely reconciliations are critical.
- Non-US and non-Canadian investors in those markets will need to align FX settlement timing with the shorter settlement window of those trades.
We recommend working closely with your brokers and front/middle/back-office service providers to understand deadline shifts and other changes to the trade processes they manage or facilitate for your portfolios. Also, ensure you have an internal team tasked with reviewing the wide array of materials published by DTCC, ICI, and SIFMA for the impacts relevant to your business.
Many are also wondering if there is a need to prepare for an eventuality of real-time gross settlement, however, we believe this is unlikely. A real-time settlement would result in the elimination of multi-lateral netting, a process which vastly reduces the amount of cash that would otherwise flow through the financial system at the end of each day. Per DTCC, the elimination of netting would mean non-netted flows currently averaging $38 billion per day would increase to a whopping $1.7 trillion daily. The more probable end state is what is colloquially known as “T+½,” which indicates moving to T+0 with an end-of-day netting of settlements.
The move to T+1 is a prime opportunity to assess your trade function, related functional areas, and operating model (and also futureproof to the extent possible for a later move to T+½). Asset managers who prepare for the new settlement cycle and optimize their operating environment will be successful in their adoption of T+1. Reach out to Olmstead today to learn how we can help you prepare for the upcoming change.