T+1 settlement: ticking all the boxes for SA fund managers
• The change poses difficulties for non-US fund managers trading US securities outside their trading hours
The introduction of T+1 trade settlement in the US, Canada and Mexico is projected for this month. The shift from T+2 was partly prompted by the volatility in stocks during the Covid-19 pandemic.
The US regulator, the Securities & Exchange Commission (SEC), is keen to provide a more secure and predictable environment for trade settlement that can cope with future high levels of volatility in US stocks.
With compliance deadlines set for May 28 in the US and May 27 in Canada and Mexico, SA fund managers must undertake meticulous preparations across all aspects of the trade life cycle. T+1 settlement will affect every stage of the process, necessitating a heightened state of readiness among asset management operations teams within fund management firms and their service providers.
The move to T+1 presents a significant operational challenge, particularly for SA fund managers accustomed to the T+2 system, as it eliminates the buffer of a business day between trading and settlement. This change poses difficulties for non-US fund managers trading US securities outside US trading hours, requiring them to adapt to tighter deadlines and potential logistical hurdles.
According to data from the Association for Financial Markets in Europe, back offices will have only two hours to carry out all post-trade work in equities. Now they have 12 hours. The SEC estimates that from 2023 only 68% of US equity trades completed their confirmation process on trade date. It is therefore important for fund managers to ensure they have all the processes in place to continue to operate North American securities settlement effectively.
BE AWARE OF THE RISKS T+1 PRESENTS
Time zone differences can affect same day matching processes, meaning fund managers will have less time to communicate and resolve breaks and exceptions. Funds outside the US engaged in securities lending will have a narrower window in which to identify and recall securities. This could lead to breaks in the process and potential settlement fails.
The shortened settlement cycle will also affect the FX life cycle and the need to fund settlement. Managers operating funds without a dollar base currency, and especially those in the Asia Pacific region where the time zone is a larger issue for staff, will need to ensure they have the staffing and operational procedures in place to monitor the trade cycle effectively.
WHAT FUND MANAGERS NEED TO DO
Fund managers outside the US should be working closely with service providers to minimise the effect of T+1 on daily operations. Close liaison with service providers will ensure they have a cohesive operational plan in place to support trading activities in the new environment.
It is essential for fund managers to liaise as closely as possible with their service providers at this stage. This includes co-ordination with any broker-dealer counterparties and finding out what service providers will be expecting when T+1 deadlines approach.
Service providers will be pushing ahead with their own plans, and fund COOs will need to be fully appraised of what is going to be different and how far along service providers are with their objectives.
Connectivity and the fund manager’s tech stack should be checked to ensure readiness levels. Trusted service providers will be in a position to support trade cycles within US trading hours without the need for fund management teams to be working unsociable hours, but at the same time any additional demands on staff should be addressed immediately.
Batch and manual processes should also be reviewed and COOs should be aware of any impact on shareholder redemptions and subscription processes. Trade confirmations, allocations and affirmation processes are also important areas of scrutiny. For fund managers engaged in securities lending, lending models should be reviewed to ensure timely recall and return of loaned securities. Time zones will be a big factor here: fund managers will need to consult closely with service providers to make sure that the crucial post-North America close window is covered.
BENEFITS TO THE INDUSTRY OF T+1
Follow the money — attention must be paid to the cash flow and cash positioning to ensure funding requirements are met and that there are no mismatches or unaddressed foreign exchange needs.
Shortening the trade cycle should help reduce counterparty exposure and provide for faster and smoother interaction between assets and cash. Overall, asset managers should see a reduction in risk exposure and less need for expensive risk mitigation procedures.
WHAT ABOUT T+0?
The market should also see a boost in straight-through processing usage, helping to accelerate settlement times. T+1 is intended to deliver a more efficient, robust and costeffective marketplace. There has been a lot of discussion about the prospects for a T+0 settlement regime in the near future, but the reality is likely to be further out. At this point the UK’s plans for T+1, as recommended by the UK Accelerated Settlement Taskforce, are for no later than the end of 2027. In the EU, the European Securities & Markets Authority is expected to produce a report on the EU transition in the third quarter of this year.
For North American markets there remain a number of operational obstacles for T+0, such as multilateral netting and transaction funding that will need to be resolved before this becomes a reality. But for fund managers outside North America, being prepared for T+1 will be an important step towards eventual T+0 compliance.
Nonetheless, the transition to T+1 signifies a pivotal moment for SA fund managers to reassess and fortify their operational frameworks, ensuring readiness to thrive in an evolving global financial landscape.
TRUSTED SERVICE PROVIDERS WILL BE IN A POSITION TO SUPPORT TRADE CYCLES WITHIN US TRADING HOURS