The Securities and Exchange Commission (SEC) has finalized its rule that will require trade settlement one business day after execution, shifting from T+2 to T+1. The SEC’s rationale behind the shortened settlement time is to benefit market participants by reducing risk, lowering latency, and promoting greater efficiency and market liquidity. Compliance with the new requirement will begin on May 28, 2024 and managers need to take steps to prepare now. Failure to adhere to T+1 after that date may incur fines, sanctions, and risk to the firm’s reputation.
T+1 will impact a firm’s technology infrastructure and operations processes across the entire trade lifecycle, including:
- Trade affirmation and matching
- Treasury management and funding
- Securities lending and inventory management
- Reference data and corporate actions
- Real-time processing
While preparation for T+1 has many facets, the significant components for readiness include the reduction of manual processes in favor of increased automation and the adoption of straight-through processing.
Charles River has been preparing for this largely anticipated change, and the Charles River Investment Management Solution (Charles River IMS) provides post-trade processing and trade settlement workflows that will support firms as they transition to T+1:
- Post-trade lifecycle management in one system
- Centralized trade confirmation through an automated straight-through processing workflow
- CTM match-to-instruct functionality
- Fast identification of failed trades and exceptions
- Dealers and traders, portfolio managers, compliance, and operations personnel all have the same real-time view of all post-trade processing activity
- Exception handling at the allocation level
- Consistent and accurate standing settlement default rules and instructions
- Automatic leverage of commission and fee rules that support override and post-trade matching corrections
The Road to T+0
It may seem premature to talk about T+0 when T+1 has yet to go into effect. However, consider that T+3 was implemented in 1993, followed by T+2 in 2017. The shift to T+1 is occurring just seven years later. As firms prepare systems and processes for T+1, it is worth considering a possible transition to T+0 in the future. Once again, technology is an enabling factor and here distributed ledger technology (DLT) presents opportunities.
The nature of DLT as a decentralized, immutable, and transparent database aligns with the requirements of T+0 settlement. DLT eliminates the possibility of a single point of failure, making it more resilient. All involved parties interact directly, using the same data at the same time, which improves transparency and trust.
These characteristics can create seamless, accurate, and near real-time settlement. However, the changes to infrastructure and process needed to adopt T+0 go beyond technology. The current ecosystem for trade settlement includes a multi-step process that requires collaboration among different parties. T+1 will still fit within that current framework, but T+0 will not – getting to same day settlement would require a significant overhaul of the existing process and infrastructure. Technology has disrupted and forced change within the financial services industry and in this case the trade settlement process will continue to reap the benefits of a more efficient market as we look towards the next transition from T+1 to T+0.
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