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T+1 - Dont let late be your fate

Experts outline the cost of non-compliance

T+1 is coming and the time to act is now.

In October 2023, SimCorp convened a panel of industry experts and investment managers to discuss the current progress of T+1 readiness and the consequences of missing the May 2024 deadline.

The panel included:

  • Barnaby Nelson, CEO, The ValueExchange
  • Krzysztof Wierzchowski, Head of Global Trade and Portfolio Services Division, Franklin Templeton
  • John Abel, Executive Director, Equity Clearance and Settlement, Product Management, DTCC
  • Mark McLean, Senior Manager, Alpha FMC
  • Alexis Lavigne, GTM Senior Strategy Principal, SimCorp

The foundation of the discussion leveraged insights from The ValueExchange (VX), who has been running ongoing surveys on T+1 since the beginning of 2023. The latest VX survey of 300 industry participants globally revealed that there is still considerable work to be done on T+1 readiness, with 40 percent of institutional investors still in the scoping phases of T+1.

The survey also revealed that an overwhelming 70 percent of buy-side firms are struggling with project funding and implementation. Consequently, around 30 percent of European entities are not sure they will affirm on T0. This increases to approximately 40 percent in APAC, compared to 17 percent in North America. With the May 2024 deadline fast approaching and clearly a lot of work still to be done, what are the potential consequences of non-compliance, and what should buy-side firms be doing to ensure T+1 readiness?

If trades are not affirmed, increased costs and risks are confirmed.

As explained by John Abel, Executive Director at DTCC, while a lack of affirmation does not stop the settlement of a trade, all statistics show that the failure rate for unaffirmed trades is markedly higher than affirmed ones.

“The numbers vary from study to study, but I think one thing is consistent: there’s always a higher fail rate on unaffirmed trades than there is on affirmed trades. It’s the expectation that we’ll have more risk of being unaffirmed as we move to this tighter affirmation window, which will inevitably impact the risk profile of the broker that’s handling these trades. Right off the bat, there’s a strong motivation to do the affirmations,” said Abel.

Under T+1, all trades need to be affirmed by 9 PM US Eastern time. If a trade does not come through DTCC’s straight through processing platform (ITP), there is an extra charge per trade. If the affirmation is later than 9 PM, members are required to submit trades directly into DTC where they will incur an additional charge of USD 0.20 or USD 0.57, depending on when the transaction is submitted for settlement. For geographies with time zone challenges (e.g., Europe, Asia, Oceania) and issues with automated processing, late affirmations can result in these extra costs.

“Those who do not affirm on time will be dealing with a higher risk of failed trades, adverse financial consequences, and the ire of the SEC and broker dealers who may make it more difficult to execute trades in the US,” Abel explained.

It's important to think about T+1 from a holistic perspective and assess the impact on the end-to-end operating model. Understanding your data, and having a good data foundation in place, is the first critical step. If you think you can simply throw more bodies at the problem and be successful, then you’re going to be disappointed.

Krzysztof Wierzchowski, Head of Global Trade and Portfolio Services Division, Franklin Templeton

Be prepared - Words of advice from Franklin Templeton

According to Krzysztof Wierzchowski, Head of Global Trade and Portfolio Services Division, Franklin Templeton are in a good place when it comes to T+1, having kicked off the preparation process in good time. “As we operate globally, we recognised quickly that it will have an impact on our operations, so it was important to start early and begin preparations to ensure we’re ready ahead of the May 2024 deadline,” Wierzchowski explained.

“It's important to think about T+1 from a holistic perspective and assess the impact on the end-to-end operating model. Understanding your data, and having a good data foundation in place, is the first critical step. If you think you can simply throw more bodies at the problem and be successful, then you’re going to be disappointed,” advised Wierzchowski.

Ensuring that data management, automated workflows and management of disparate currencies are in place is more daunting than one would expect at first glance and time is needed to address the issues. As noted by The ValueExchange, 20 percent of institutional investors are still seeking T+1 project funding and another 31 percent are still in the scoping phase.

Increased focus on investable cash – present and future

Alpha FMC’s Mark McLean indicates that their clients are using T+1 as a catalyst to look at their cash management processes, particularly with a view toward automation.

“It will no longer be enough to know the investable cash position at the beginning or end of the day, but throughout the day. And it will be imperative to accurately project available cash positions over the next 3-5 trading days and make informed investment decisions with investable cash in mind,” said McLean.

Interestingly, but perhaps not surprisingly, the investment managers that Alpha FMC see with the most challenges in this area are those with multiple investment books of record (or IBORs) and overly reliant on manual processes to get to a single version of the truth with respect to cash and other positions.

“We’ve been speaking with several clients that are trying to understand their current cash management processes. These tend to be large organizations, with multiple IBORs, and have multiple ways of funding the portfolios they're in. The goal of course is to automate as much as possible and minimize the number of manual interventions,” explained McLean.

The importance of automation was echoed by Alexis Lavigne, GTM Senior Strategy Principal at SimCorp. “The transition to T+1 means that the confirmation, settlement, and reconciliation steps of the trade workflow will have to happen almost twice as quickly as they do today, with the same degree of accuracy. This means you need to automate as much as possible. Reactive manual processes are no longer going to cut it when switching to T+1,” Lavigne explained.

All in all, the unanimous advice of the panel to these groups is to get started now, before it’s too little, too late.

How to move forward – what to look for when considering T+1 solutions.

Rather than adopting the tried-and-true solution of throwing more people and spreadsheets at the problem, the panelists agreed that firms should take a more strategic and holistic approach to addressing T+1. Below is a summary of the advice offered by the panel on how to ensure readiness for T+1, and what to look for in a T+1 enabled solution:

  • Real time data accessible from a front-to-back investment managed platform.
    Adopt a centralized investment management platform covering the full investment management lifecycle, with a single Investment Book of Record (IBOR) and Accounting Book of Record (ABOR) that supports business functions across all asset classes and geographies. Such an integrated multi-asset platform is the foundation for enabling a real-time total portfolio view and real-time data access across the organization, minimizing the impact of T+1 changes in areas such as FX, funding, and corporate actions, which – for T+1 purposes - means that changes to settlement times can be handled quickly, efficiently, and automatically.
  • Fully SaaS enabled.
    Deploy SaaS for a resilient and flexible operating model. A SaaS enabled model gives you the optionality and scale to future proof your operating model and ensure that you are always T+1 compliant.
  • Market connectivity providing enhanced, enriched, and standardized data for maximum STP.
    Ensure that your technology architecture is optimized for maximum straight-through-processing (STP). Optimal solutions for T+1, and investment processing in general, provide easy connectivity to a vast array of venues, custodians, and counterparties, resulting in better data quality, higher straight-through-processing (STP) rates, and enhanced exception handling. T+1 compliance should be assured, including with multiple custodians.
  • Follow the sun operating model.
    For those in EMEA and Asia/Oceania, where possible, adopting a follow the sun approach to ensure that T+1 obligations are met. This may include establishing an operations team in the Americas that operates in the local time zone, and has strong relationships with local custodians and counterparties.
  • Open ecosystem. Leverage the open ecosystem to speed up the innovation process.
    No single solution provider can cover all possible needs you may have. The most progressive providers offer an open ecosystem, which allows firms to extend the capabilities of their existing platforms with pre-integrated innovative technology from fintech providers, without the costs of undertaking their own integration. This gives you the freedom to select the partners that best fit with your investment workflows and T+1 compliance needs.

To learn more about how SimCorp can have you ready for T+1, please reach out to your SimCorp representative, who will be happy to share how we’re helping buy-side firms across the globe to become T+1 compliant, as well as discuss how we can best assist based on your current and future state operating model.

How can you better prepare for T+1 settlement?

Learn how you can better prepare for T+1 settlement. Watch the webinar for exclusive insights from Franklin Templeton, DTCC, Alpha FMC and The ValueExchange.

Watch the webinar

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