Ready to settle twice as fast? SEC sets T+1 standard in the US

What is impacted by T+1?

Clearing and settlement are the areas that will be most affected. In brief, T+1 shortens existing settlement (and related) processes by several hours versus today, with the overall impact truncating settlement time from two days post trade to one. A non-exhaustive summary of T+1 impacts on trade processing is given below (all times shown are US Eastern time):

• Action: Allocations (DTCC recommended) | Current deadline (T+2): 9:30 AM day after trade | New deadline (T+1): 7 PM day of trade
• Action: Affirmations (DTCC recommended) | Current deadline (T+2): 11:30 AM day after trade | New deadline (T+1): 9 PM day of trade
• Action: Trade matching | Current deadline (T+2): 11:30 AM two days after trade | New deadline (T+1): 9 PM day of trade
• Action: Settlement | Current deadline (T+2): two days | New deadline (T+1): One day
• Action: Corporate Actions (ex-dividend date) | Current deadline (T+2): T+1 | New deadline (T+1): T (same day)
• Action: Securities lending cutoff & recall time | Current deadline (T+2): 3 PM day after trade | New deadline (T+1): 9:30 PM day of trade

Source: T1_Industry_Implementation_Playbook_vF.pdf (sifma.org)

The move to T+1 is impactful in most firms for four reasons:

1. changes to operational workflows and processes
2. investment costs associated with the change (project teams and technology)
3. finding the right internal (or external) resources to facilitate the change
4. regulatory considerations

In 2017, after the three-year run-up from T+3 to T+2, legacy infrastructure struggled to keep up. With T+1, the level of risk just ratcheted up to a higher level. T+1 is a compelling event that is akin to Corporate Darwinism- will your company survive, thrive, or nosedive?

Benjamin Page-Fort, Director GTM Strategy, SimCorp

T+1 is mandated by the United States, but with global implications

For obvious reasons, the primary impact of the T+1 legislation will be in the United States. However, the new T+1 regulation will have a significant affect to any investment manager trading US securities. As an illustration of this, a recent ValueExchange report shows that custodians in Europe and Asia Pacific see T+1 as having a far greater impact (4.7/5) on their businesses than their American counterparts (3.3/5). Time zone challenges, lack of operational personnel and coordination with custodians to cover North America are the most prevalent issues. Regardless of where an investment manager is located, for those unable to support T+1 their ability to continue trading in the US market will be severely compromised once the legislation takes effect.

This is not the kind of legacy you want to have 

Will you be ready for T+1 in a year from now? The ValueExchange numbers show that 61% of buy-side investment managers surveyed have not started any T+1 preparations, and 43% do not believe that they will be ready in a year from now (March 2024) – two months before the deadline. Just as alarmingly, 66% of respondents were finding it difficult to find adequate personnel to staff T+1 projects. 

The data and integration demands are not easily adjusted in large firms with old legacy technology. The risk is further amplified when replacing legacy solutions while continuing to operate normally or making changes “in-flight.” If you find yourself continuing to rely on old in-house or legacy systems, then you may be in trouble. In 2017, after the three-year run-up from T+3 to T+2, legacy infrastructure struggled to keep up. With T+1, the level of risk just ratcheted up to a higher level. T+1 is a compelling event that is akin to Corporate Darwinism- will your company survive, thrive, or nosedive?  

Think of it this way- for those with fond memories of the 1990s and early 2000s, compare things from that period to your current smart phone. In the “old days”, you had a phone to make calls, a PDA for a calendar, a map to find directions, a Walkman to listen to music and a film-based camera to take pictures. All of these things could still work today but no one outside a museum would think of using them. 

A parallel can be drawn to your investment management IT infrastructure- why would you allow your business to be dependent on tools developed for a time when Bill Clinton was still President of the United States? Tools that are heavily reliant on error-prone manual processes and/or spreadsheets? Where the number of workarounds are so many you’ve lost count? And the people who built and implemented the system are long gone? And it takes hours just to figure out what your positions are? Back then it was T+5, not T+1. There are solutions to avoid these problems - if you need to modernize your infrastructure to cut your settlement times in half, now’s the time. 

The cost of doing nothing is rather expensive

The ramifications of non-compliance are steep. In addition to the massive reputational risk exposure, the fines/sanctions etc. will start to get expensive, and the viability of your business (as it relates to trading in the US) will be under severe threat. A parallel of sorts can be drawn to the recent CSDR regulation in Europe, where non-compliant banks are facing fines up to EUR 5 million per month for failure to adequately govern their settlement processes.

On the positive side, T+1 compliance will have several benefits, including reduced counterparty, market and credit risk. One tangible benefit is operational alpha- the DTCC estimates that there will be a 41% reduction in the volatility portion of NSCC margin requirements – freeing up more capital for investments. This is a significant competitive advantage to firms who can get to T+1 as front runners in the market.

When doing the math, make sure you use the right equation

In terms of modernizing ancient IT infrastructure, a year is not a long time. If you are one of those who needs to modernize and have yet to start, you need to investigate how you can outsource IT operations and focus on your core business and the competencies that make your business unique. At this point, it’s too late for traditional on-premise or in-house approaches.

You may ask where solution providers like SimCorp come into the mix. After all, there are plenty of consultants offering their expertise. However, it is difficult to build anything on top of an unstable foundation. SimCorp has the world’s only combined near real time IBOR and ABOR, with unmatched process automation and immediate position oversight, SimCorp is uniquely positioned to help you overcome any T+1 challenges and ensure your continued viability in the US market.

How to ensure you get through this, and the next obstacle? Is it time to invest in your future?

When looking at your operating model, you need to make sure it can manage the needs of the future as well as the present. In other words, T+1 is but one of many regulatory or market driven changes you will encounter going forward. You need to be ready for whatever challenge confronts your business, as well as innovate when you decide you want to lead rather than follow. SimCorp has invested more than US500 million in the past six years to support whatever operating model you feel is best for your business, now and going forward. This frees your scarce resources to focus on what matters most- generating alpha for your clients.

Utilizing trusted software is not where it has to stop, when looking into the future operating model you should also consider other models of support. Services can reduce human risk (training/recruiting) of such changes. Business operational services are being adopted to reduce the burden for operations team and harness the scalability and skillset of a larger servicing model. 

Questions you might ask before making changes:  

• Do I trust in my positional data at all times?
• Can I rely on my vendor to adapt to market conditions? 
• When the market changes, can I change with it? How future-proof is my model?
• Can I scale my operations without going into the market for staff? 

We are here to help you, not compete with you

With SimCorp and our new technology enabled services solution, you decide what operational elements you want to control yourself and what can be outsourced. With 50+ years of experience serving buy-side investment managers (not competing with them for mandates), SimCorp has the proven track record and best practices in place to facilitate a smooth transition to T+1.