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 * Solutions
   * Automated Reconciliations
   * Asset Management
     * CASS Compliance
     * MiFID II Post-Trade Reporting
     * Regulatory Reporting
   * Banking
     * Data Migration
     * Financial Controls
   * Insurance
     * IFRS 17
     * Insurance Broker Accounting (IBA)
   * Payments
     * Payment and e-Money Safeguarding
 * Products
   * AutoRek
   * ReKognize
   * VanguARd
 * Customers
   * Customer Case Studies
   * Customer Success
 * Insights
   * Insights
   * Events
   * News & Blogs
 * About
   * Corporate Social Responsibility
   * Careers
   * What We Do
   * Contact Us


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Blogs


HOW T+1 SETTLEMENT WILL IMPACT 4 KEY OPERATIONAL PROCESSES

Read time: 6 mins

 

In our T+1 settlement blog series so far, we’ve outlined the main T+1 settlement
changes in the UK and US, and have explained their impact on FX challenges and
data. In our fourth blog, AutoRek Product Manager Murray Campbell sets out how a
reduced settlement window will impact four key operational processes.

In August, the Depository Trust & Clearing Corporation (DTCC) in the US opened a
testing program ahead of the move to T+1 settlement. The program, expected to
run for nine months, gives firms the chance to perform full end-to-end testing
ahead of the change.

The DTCC’s decision to launch the programme means we can expect T+1’s impact to
be considerable and cover the full trade cycle.

The Association for Financial Markets in Europe (AFME) estimates the move to T+1
will result in an 83% reduction in the post-trade processing time. Current
operational processes across firms are based on the T+2 settlement cycle. In
simple terms, the shorter settlement window means firms have less time to
complete processes.

Factoring in the challenges of cross-border transactions and FX requirements
only heightens this challenge.

 

THE IMPORTANCE OF REVIEWING OPERATING MODELS

Firms must first consider their operating model and determine how prepared it is
to adapt to T+1 settlement. Throwing more bodies at manual and inefficient
processes won’t improve them. Instead, firms need to identify and resolve
inefficient processes by investing in technology.

Efficient and flexible middle and back-office functions are key to meeting both
client expectations and managing market and counterparty requirements. However,
investment is typically limited in these areas, so processes often remain manual
and inflexible.

Ensuring processes are efficient will be key to meeting the changes coming from
accelerated settlement. Here are four key processes which the move to T+1 will
impact:



 

 1. CASH FORECASTING AND LIQUIDITY MANAGEMENT

Cash forecasting and liquidity management are essential components of a
well-functioning settlement process. Firms must monitor cash balances and
security positions to prepare for upcoming market settlement.

The move to T+1 settlement requires firms to carry out these processes as close
to real-time as possible. Truncated timelines will mean teams can’t wait to
aggregate the prior day’s trading activity to know what cash is required to
facilitate the next day’s net settlement.

Before the end of the trading day, firms will need to understand the position
required to settle the next day and make funding transactions as required.

To carry this out near real-time, teams will need a view into trades as they are
being executed. This allows them to build up that expected aggregate settlement
position. Spreadsheets – which become dated almost as soon as they are created –
won’t be sufficient to perform processes intraday.

 

 2. TRADE CAPTURE AND EXECUTION

Trade capture and execution vary across firms, ranging from sophisticated order
management systems to spreadsheets.

Accurate and timely trade capture will be essential for teams to immediately
start post-trade activities in preparation for settlement the next day. It will
also be imperative to facilitate T+1 settlement, which reduces the window to
identify and resolve errors.

Firms must therefore look at how they complete these processes and determine how
they can receive timely and meaningful output from their records to inform
subsequent processes.

Control checks will be essential for immediately escalating trades, which are
sometimes recorded incorrectly. Validating key trade metrics, for example,
character length on ISINs, will alert firms to corrections that may be required
earlier.

Further checks to ensure the minimum level of information has been recorded
across all mandatory trade fields will enhance control over a firm’s trade
capture.

Firms must review the journey a trade takes from the initial capture of the
instruction to passing to the market or counterparty for execution. This
includes determining where along that journey manual inefficiencies exist – and
if trades are exported from one system to be uploaded into another or passed to
the market.

 

 3. FOREIGN EXCHANGE

All firms involved in the trading of US-listed securities, irrespective of
global location, will have to comply with accelerated settlement when it goes
live.

The reduced settlement window will result in the need for timely execution of FX
transactions to ensure firms outside the US hold sufficient dollars to settle
their trades. This will also factor heavily in the need for cash forecasting and
liquidity management processes. Firms will need a clear understanding of their
current day’s trading activity and associated foreign exchange transactions to
have comfort over their positions ahead of the next day’s settlement.

The significance of this challenge will be determined by the location of a
firm’s business. While the time difference from the US to the UK presents a
challenge, this is only heightened the further east you travel.

Take, for example, Asia-based firms trading in US-listed securities. The process
of confirming orders and filling allocations will leave very little time to
instruct the FX trade to ensure funds are available for settlement. This will
present a material challenge and may require holding greater cross-currency
liquidity, which has its own challenges.

Ideally, firms will need to execute FX transactions as close to the point of
trade execution as possible. This will maximise the opportunity for the required
USD to be in place ahead of trade settlement. Firms should also review their
current FX process flow, including the aggregation of orders into a daily net
settlement value, to allow for timely instruction of FX trades.

Looking further ahead, much of the conversation on T+1 introduces the journey to
T+0. Developments in the introduction of Central Bank Digital Currencies (CBDCs)
to allow for the immediate and continuous settlement of currency transactions
may be an important facilitator of that discussion.

 

 4. RECONCILIATION

Reconciliations are a key operational process and are typically a retrospective
control check that confirms whether transactions were processed accurately the
previous day. Inaccuracies must be identified and resolved as soon as possible.
While time is allowed for this step within the current T+2 settlement cycle,
moving to T+1 will demand swifter action.

The move to perform intraday reconciliations is incumbent on the availability of
quality data and investing in the best technology to deliver an efficient
process.

Capturing intraday trade confirmations from across market counterparties will
require a shift in the typical data exchange which is currently provided. Where
reconciliations are performed on T+1, the required data can be received as an
end-of-day statement. The need for a timelier reconciliation process will rely
on intraday confirmations, which allow firms to immediately compare internal
trading records.

Firms must perform a full review of their existing reconciliation processes and
the data used within those to identify where they can make them more efficient.
This may include, for example, requesting intraday Swift statements for market
counterparties to execute immediate reconciliations.

Advanced reconciliation solutions offer firms the opportunity to automate key
processes and deliver efficiency and increased control. Automated tools that
ingest and compare data allow firms to review records upon receiving them and
immediately escalate inaccuracies for further investigation.

Furthermore, intelligent matching allows firms to compare all trade metrics from
across a range of fields between sources. This ensures that records are correct
and users can identify data mismatches early.

 

HOW AUTOREK CAN HELP WITH T+1

If you’re preparing for T+1, AutoRek can help you get your operational processes
ready for faster settlement times.

Our end-to-end automated reconciliation software allows you to reconcile as soon
as your data is ready, minimise failed trades, save time on the pre-settlement
process, and tackle exceptions quickly.

 

Talk to our team today.

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FURTHER READING

Blogs September 11, 2023

T+1 SETTLEMENT: THE CHALLENGES FACING ASSET MANAGERS WITH FX EXPOSURE

Read more
Blogs August 21, 2023

T+1 SETTLEMENT: WHAT YOU NEED TO KNOW

Read more
Blogs October 2, 2023

T+1: HOW A REDUCED SETTLEMENT WINDOW WILL IMPACT DATA

Read more
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