What is T+1 for US markets and when is it happening?
The US Securities and Exchange Commission is changing the rules for US securities which will shorten the settlement times required for trades in US markets. It is expected that this will be implemented as soon as the end of March 2024. The industry will likely move to transition over a three day weekend in Q2 next year, as happened with the shift to T+2.
T+1 settlement is intended to reduce risk by shortening the number of days between trade execution and settlement. The hope is that this will also reduce counterparty, market and credit risks. However, post-trade activities will have to take place in a much shorter time frame. The change presents significant operational challenges for fund managers.
How will this impact fund managers outside the US?
A move to T+1 is in many ways a bigger operational challenge than, say, T+2, because it removes the only business day between trading and settlement. For fund managers who are trading US securities outside US trading hours, these new deadlines will present a real operational problem. It is important that COOs of funds with US markets exposure start to put in place plans for T+1 and work with their service providers to address these changes as soon as possible.
Why will time zones become an issue for many fund managers?
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 less time in which to identify and recall securities. This could lead to breaks in the process and potentially settlement fails.
Many ETFs, which have diverse underlying portfolios, can already experience settlement delays under a T+2 environment. These pressures will be enhanced when the US moves to T+1.
What can you do to mitigate risks?
- Consult with your service providers to ensure they have a proper operational plan in place to support trading activities in the new environment.
- Ensure your connectivity and tech stack are fit for purpose and that your trading processes will be able to perform under new deadlines, at least for US securities.
- Work with trusted service providers who can support trade cycles within US trading hours without the need for your own teams to be working unsociable hours.
Are there any other implications?
Other regions may follow the US to impose their own T+1 settlement deadlines. For example, the Association of Financial Markets in Europe has published a discussion paper on the practicalities of introducing a one-day settlement cycle. It is therefore advisable, even if you do not currently have US markets exposure, that you review your settlement communications arrangements at an early opportunity.
In addition, the shortened settlement cycle will also impact the related FX lifecycle that will be needed to fund settlement. This represents a significantly shortened operating window between trade and settlement. Managers operating funds without a USD base currency and especially those in the Asia Pacific region, where again, the time zone is a larger issue for staff, will need to consider a way to address this problem.
Truss Edge is the portfolio management solution delivering regulatory enhancements to our hedgefund clients for over 20 and over 12 years for ETFs. When the industry moves forward with market or regulatory changes, like new commodity markets, MiFid II, CSDR or now T+1, we are producing solutions for our clients ahead of the rest of the industry.
We do this by always seeking solutions to automate and deliver true straight through processing built on our real-world industry expertise.
With teams in Chicago, London and Malta, our global footprint allows our outsourced operations professionals and 24×7 technology to leverage timezones and ensure our clients are ahead of the game.