As the countdown to the Memorial Day weekend, marking the transition to T+1 settlement, draws closer, the impending change looms large over firms worldwide. Several months ago, I had the privilege of addressing the Texas Banker’s Association regarding this transition within the securities industry of settling trades on T+1, the day after the trade is executed. There is substantial operational work that must occur between trade execution and settlement. The SEC’s new rule essentially propels securities operations into a T+0 framework, as all trades must be allocated, confirmed, and affirmed by 9:00 PM Eastern Time on the trade date. With decades of experience in securities operations, I emphasized the critical importance of directing attention towards the pre-settlement process.
With only a few months remaining until the T+1 settlement implementation, the securities industry has focused on organizational preparedness. Trade affirmation rates have traditionally served as a reliable metric for evaluating operational efficiency. Although the new regulations do not specify affirmation rate targets, their monitoring remains crucial due to the significant impact of the T+1 environment on trade operations.
In January of this year, DTCC echoed similar sentiments and recommended a proactive focus on affirming trades at an earlier stage. (The full report is found here.) The timeliness and accuracy of trades, from allocation through confirmation to affirmation, are pivotal factors for successful and prompt settlement. Thus, affirming trades efficiently contributes to minimizing failed trades and fostering straight-through processing. If trades are already allocated to the proper customer accounts, all the information between the buyer and seller is matched and accurately reported to DTCC by the 9:00PM deadline. The trades will settle the next morning in an automated manner. However, if the trade isn’t affirmed accurately or in a timely manner, manual intervention will be necessary.
In the current T+2 settlement landscape, the affirmation deadline stands at 11:30 AM on T+1. However, post-May 28, 2024, the affirmation cutoff shifts to 9:00 PM on T+0. Our industry will have to operate with a narrower pre-settlement window to comply with T+1. According to recent DTCC reports, while approximately 90% of all trades are affirmed on T+1, only 69% of trades are affirmed by 9:00 PM on trade date or “T+0.” Despite this improvement from the 65% reported in June 2023, there is significant room for improvement.
While the transition from T+3 to T+2 settlement was absorbed with minimal procedural changes, the shift to T+1 demands more substantial process improvements. To fully realize the efficiency and effectiveness envisioned by the SEC with T+1, firms must extend their review beyond the trade settlement desk to encompass end-to-end trade workflows. This comprehensive evaluation covering onboarding, vendor management, and technology platforms goes beyond preparation for regulatory compliance and sets a foundation for improved operational efficiency.
Embarking on such a project may seem daunting, especially with the effective date of T+1 looming just four months away. Firms yet to initiate this process improvement journey can adopt a short-term strategy for regulatory compliance while concurrently developing a long-term strategy extended past Memorial Day aimed at delivering enduring benefits to clients and firms alike.
Danny McHale is the Founder and President of Straight Arrow Solutions. If you’re seeking a seasoned financial services professional to help untangle operational complexities or streamline your wealth management processes, please reach out to collaborate and drive your financial endeavors toward success!