T+1 - An opportunity to thoroughly analyze and realign your process automation

The Securities and Exchange Commission (SEC) has announced a new rule for the American stock market (representing approximately 50% of the globally traded equity volume). As of May 28, 2024, this rule mandates a trade settlement cycle of one business day after execution, transitioning from T+2 to T+1. The underlying rationale for this change a shortened settlement cycle is to aid market participants by reducing risk, decreasing latency times, and promoting greater efficiency and market liquidity. Failure to comply with T+1 after this date may result in fines, sanctions, and reputational risks.

How prepared are you?

While this change may be well-known to most European market participants, current market surveys reveal that a significant number of them have not adequately prepared for this substantial process transformation. A survey¹ of over 280 asset managers shows that more than 40% of respondents have not yet commenced planning for T+1.

Implications for European asset managers, custodians, and investors are profound

Due to the time difference (US close-of-business at 9 PM ET, equivalent to 3 AM CET), any exceptions, disparities, or specific settlement issues will need to be resolved either through late-shift staff or directly with fund managers/traders. Even if one were to consider the current proposed Canadian extension of the settlement window overnight to 4 AM US ET (equivalent to 10 AM Europe CET) for T+1, the operational window for trade settlement would still shrink by up to 83% compared to the current environment.

The shift to T+1 will have a sustained impact on the entire trading and settlement cycle, particularly in the following processes:

• Treasury management and the cash side of securities business
• Trade matching and confirmations
• Securities lending and inventory management
• Corporate actions
• Real-time processing
• Reference data

Example: Treasury management and the cash side of securities business

To illustrate the challenges that European market participants will need to address in the US stock market from May 28, 2024, let's delve deeper into the realm of treasury and the cash side of securities settlement.

Buying or selling stocks across different countries (and currencies) significantly complicates overall liquidity management. With every transaction, it is crucial to ensure that the required liquidity is available for seamless trade settlement (time-critical in US dollars/foreign currency). The drastic reduction of the timeframe to T+1 considerably shortens the window for executing foreign exchange transactions, including currency-specific payments.

As a result, precise coordination and communication among all parties involved in settlement (investors, brokers, custodians, clearing houses, etc.) within this new, tight time frame become imperative.

Intelligent process automation or outsourcing as solutions

This procedural challenge, implementing complex requirements within a significantly shortened time frame, pushes even existing automated processes to or beyond their limits. The shortened settlement cycle also carries the risk of increased error frequency, which could lead to additional costs and delays in settlement. The presence of different time zones further intensifies this challenge.

Therefore,the industry is under pressure to expand fully automated reconciliation and confirmation systems and advance the removal of unstructured instructions and processes. Side effects of these changes may include improved compliance and cost structures.

An opportunity to thoroughly analyze and realign your processes

We already see some asset managers in the market planning and partially implementing solutions for intelligent automation of this challenge through the provision of new or expanded functionalities. However, due to the tight deadline, many are missing the opportunity to fundamentally realign their processes (rather than through ad-hoc projects) and to secure their future across the entire process spectrum.

The concept of hyperautomation comes into play here: it involves the orchestrated use of multiple technologies, tools, or platforms to make processes fit and flexible for the future. Tools that can be employed include artificial intelligence (AI), machine learning (ML), event-driven software architecture, robotic process automation (RPA), and last but not least, blockchain technology. The latter is crucial should a scenario of real-time or T0 settlement emerge, where AI and distributed ledger technology play a key role.

However, not everything that is possible is economically reasonable for every market participant. Therefore, having data- and analysis-based answers to the following questions is particularly crucial:

• Have you analyzed your processes in detail and clearly defined your value chain?
• Where do you generate revenue, and what are pure cost centers?
• Make or buy – What is the best decision based on your individual business case?
• Do you know if your automated reconciliation and confirmation systems can already handle these challenges today?

Preyer's unique consulting approach: providing targeted and individual support

Our greatest strength lies in optimizing the synergy between business and IT! This is a fundamental requirement in the realm of hyperautomation, as the success of such a profound process change depends heavily on the involvement and understanding of all stakeholders.

Our consulting services specifically include:

• Analysis and depiction of the current state with a focus on your value chain
• Support in defining the goals of process optimization
• "Make or Buy" analyses
• Possible presentation and examination of outsourcing options
• Clear definition and examination of suitability for future automation, technology selection, and governance
• Involvement of all stakeholders in decision-making, establishment of robust testing practices, development of a prioritization approach for selecting automated use cases
• Establishment of production monitoring for adaptive process development
• Project management that involves all relevant departments early in automation initiatives
• Creation of metrics to quantify success

[1] DTCC Survey (Deposit Trust & Clearing Corporation) in cooperation with other sector groups

‍Author: Jörg Isselmann

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