Are You Ready for the T+1 Settlement Cycle?

The Securities and Exchange Commission (SEC) will soon make a significant change that impacts how all U.S. securities transactions are settled through the Depository Trust Company (DTC). With the adoption of a rule amendment shortening the settlement cycle from T+2 to T+1 as of May 28, 2024, buy-side firms are facing a transformative shift in post-trade processing and cash management, one that is intended to enhance market efficiency, reduce risk, and bring the U.S. market more in line with global standards.

In this blog, we will explore the implications and challenges that funds and asset managers need to consider before the transition to T+1 settlement.

The Push for T+1 Settlement

The move to T+1 settlement is driven by a desire to mitigate risk and align U.S. markets with their global counterparts. By cutting the settlement cycle in half, market participants aim to reduce credit, market, and liquidity risks associated with unsettled securities transactions. The SEC believes that this change will not only enhance investor protection but also promote more efficient and resilient market infrastructure.

Impact on Buy-Side Firms

From our perspective, the shift to T+1 settlement will have six major effects on buy-side firms:

1. Operational overhaul: T+1 settlement will necessitate a comprehensive operational overhaul for funds accustomed to T+2 settlement. Allocation and confirmation, along with other key tasks, must now occur on the trade date itself. Specifically, the new guideline sets a 7:00 PM ET deadline for allocations and a 9:00 PM ET cutoff for straight-through processing (STP) affirmations on the trade date. This compressed timeframe increases pressure on buy-side firms to ensure they can complete these processes in half as much time as before, which will likely require a reevaluation of target operating models.
2. Wider reach: With the reduced settlement cycle, funds operating in multiple regions must adapt quickly. Asian markets, for example, will go from having one full day for trade reconciliation to as little as two hours, depending on the market. Meeting this goal will require robust coordination and readiness across borders.
3. Elevated costs: While no regulatory penalties are levied for missing the T+1 affirmation deadline, failing to meet the 9:00 PM ET threshold will trigger semi-automated or manual procedures for brokers, dealers, and custodians. This may lead to a decline in STP and higher expenses per transaction outside of the affirmation process, contributing to overall inefficiency.
4. Counterparty readiness: Despite the looming deadline, a significant portion of industry participants have not yet started preparations for T+1 settlement. The readiness of counterparties is a critical risk factor in any fund’s ability to successfully navigate the T+1 settlement environment. In other words, even if your firm is fully prepared for the shift but your counterparties are not, the impact on your fund could be significant.
5. System evaluation: The path to T+1 requires a thorough assessment of operational systems and their overall integration. Funds must undertake a comprehensive system evaluation sooner than later to pinpoint areas for enhancement. It is incumbent upon funds to guarantee readiness for the transition.
6. Adopting automation: Automation will be critical for buy-side firms to successfully adapt to the T+1 settlement cycle. Automation tools like IVP Cash Management Solution can play a pivotal role in eliminating slow manual workflows and maximizing operational efficiencies. For example, this cash management solution can streamline all settlements for unified risk control and regulatory compliance, with full transparency and multi-level access control for efficient cash management and a much smoother transition to T+1 settlement.

The T+1 settlement cycle will arrive sooner than you think. In the meantime, buy-side firms must prepare for a fundamental shift in post-trade processing expectations. While the benefits of reduced risk and improved market efficiency are important, the challenges are just as significant. To thrive in the T+1 era, funds must act now and do everything in their power to ensure they are prepared for this historic transformation in the U.S. financial landscape.

To find out how the IVP Cash Management Solution can help you make an easier transition to T+1 settlement, contact us at sales@ivp.in to set up a live or online demo.