As T+1 timeframes accelerate, banking and markets expert Allen Lewis explores what needs to happen next.
Spring forward?
Recent months have certainly set a new pace for T+1.
- On February 15th 2023, following industry calls propelled by recent periods of extraordinary market volatility, the Securities and Exchange Commission (SEC) adopted its rule change proposal for a shortened US trade date plus one (T+1) securities transaction settlement standard, as well as existing rule amendments affecting how broker-dealers, investment advisers and certain clearing agencies process institutional and record-keeping trades.
- Industry lobbying for a Labor Day 2024 implementation was rejected in favour of an earlier mandated compliance date of May 28th 2024.
- Following the SEC’s ruling that same day, the Canadian Capital Markets Association (CCMA) announced Canada would likewise adopt a T+1 framework on May 27th 2024, to remain in lockstep alignment with the US.
- Mexico have also joined the movement toward implementing a shortened settlement cycle as the T+1 deadline approaches, confirming they will introduce a shortened settlement cycle on May 28th 2024.
Now, after a small handful of industry readiness working groups were launched in late 2021, we are now seeing individual vendors and global service providers start to host client events.
But there’s a problem.
These forums predominately focus on the needs of their sponsors. Impacted firms are still left with the task of managing and coordinating their T+1 programs and required testing needs holistically across custodians, clearing houses, trading venues, data vendors, middle office service providers, counterparties, and clients, not to mention any internal testing required for new systems or enhancements to support the new accelerated processing time frame.
In February, the Depository Trust and Clearing Corporation (DTCC) published its revised testing time frame comprised of 21 different testing windows beginning in April and running through May 2024. In Canada, the Canadian Depository for Securities (CDS) put out its testing plan slated for 15 weeks beginning in January of the next year. Most custodians, middle-office software solution and data vendors, and BPO providers have still yet to release their testing plans.
Institutions are therefore still faced with the daunting task of coordinating a multitude of non-centralized external testing plans driven by the complexities and external dependencies of their operating architectures. And, of course, before testing can even commence, firms must first conduct readiness assessments to map out what their T+1 compliant model looks like and then execute on building it.
There are many risks associated with uncoordinated testing efforts, not least:
- integration of systems with data, processing/batch, and shared test environment dependencies
- gaps in test planning, creation, and communication
- schedule slippage
- uncontrolled/untracked requirement changes
- inability to take timely corrective actions
An evaporating runway
The 2017 conversion to T+2 took the industry over 30 months to execute.
- Exhaustive organizational readiness analyses across operations, technology and legal were conducted to assess the new systems needed, new process requirements and to develop comprehensive testing roadmaps (such as internal, industry-wide, scenario-based).
- Industry playbooks evaluated the transition impacts across their business models, product offerings, risk and compliance policies, and customer bases.
- Remediation blueprints looked to address the reputational, operational, and commercial risks that could be associated with configuration errors; partial mappings; incomplete calculation updates; and failures to appropriately evaluate upstream/downstream workflow impacts.
A recently published survey of US and Canadian T+1 readiness by ValueExchange found that 41% of the global industry had not even started to prepare for T+1 with over 60% of that population comprised of buy-side firms.
The survey also highlighted that the industry is running at a ready-rate of under 50% for the go-live cut-off next year.
As of now, the industry has barely a year left.
Preparation. Preparation. Preparation.
With such an industry ‘big-bang’ approach, it is inevitable testing resources and environments will be strained significantly as clients compete for testing system access and service providers struggle with queue prioritization.
Firms which have not yet conducted readiness assessments are severely behind.
Teams should be drafting internal and external test plans (including BAU, stress, regression, and integration) and securing the necessary budgets and resources now.
At Davies we are here to help at each stage of the way. We have experienced professionals which can manage or assist the T+1 vertical from readiness to implementation to testing to “go-live”.
- To discuss how we can assist your T+1 transition, please contact us direct.
- Download our short guide: The Road to T+1.
