The move to a T+1 settlement cycle in the US, Canada and Mexico offers investment managers a new opportunity to drive growth across their organizations through a wide range of process improvements.
It starts with embracing automation to facilitate the internal workflow enhancements that are essential for compliance with T+1 legislation. Adopting technology-led solutions offered by third-party providers can also help boost efficiencies across trading operations.
Putting these systems and processes in place will not only ensure you can manage risk and funding challenges inherent in a shortened settlement cycle; it can also leave your organization in a stronger position to service clients and members.
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T+1 Impacts on Specific Trading Operations
As we’ve discussed in previous articles, T+1 will impact activities across the trade process. With the right tools and solutions, managers can facilitate T+1 compliance and capture business enhancements across their workflows through technology and automation.
State Street is a leading financial services provider. Every day, more than 10 percent* of the world’s assets flow through our doors, so we see what others can’t. With deep insights into macro and regulatory trends, we’re well-prepared to support you in all aspects of T+1.
*Represents State Street AUC/A divided by Global Financial Assets, including Global Equity, Global Debt Securities and Global Broad Money (M3), as of December 31, 2022. Sources: SIFMA, OECD, World Bank. This represents State Street’s 2023 Q4 assets under custody and/or administration, AUCA, (USD $41.8 trillion) as of December 31, 2023.
Affirmation Models and Settlement Instructions
Here automation is key. Under T+1, trades will have to be affirmed by 9 p.m. Eastern Time on the trade date, meaning the trading entity must get the trade to their custodian in time for them to conduct the affirmation process and resend it to the Depository Trust and Clearing Corporation (DTCC). Manual affirmations performed by the custodian require at least two hours, and sometimes even more.
This indicates that even trades delivered on trade day might not settle under the new regime, if they come through too close to the 9 p.m. deadline. Automated affirmation tools, such as DTCC’s Central Trade Manager (CTM) or Match to Instruct (M2i) can make this process quicker as they deliver pre-matched information to the custodian.
For more information about our trade and post trade technology solutions, see here. Review our outsourced trading capabilities here.
10%
State Street is a leading financial services provider. Every day, more than 10 percent* of the world’s assets flow through our doors, so we see what others can’t. With deep insights into macro and regulatory trends, we’re well-prepared to support you in all aspects of T+1.
Foreign Exchange (FX)
Cross-border trades requiring currency conversions need the FX elements of the deal to be completed in concert with the equity trade. This enables the trades to meet the truncated settlement and completion timeline required under T+1 rules. As such, closer alignment of FX workflow and execution with trade settlement becomes increasingly important post-T+1 implementation.
For trades in base currencies other than the United States or Canadian dollar, a timely FX transaction is required to ensure settlement of the security trade, purchase of the equity funding currency, or repatriation back to base currency. Trading platforms may need to be linked to align FX execution with trade settlement. We expect most FX transactions to be executed for same-day value; automation and straight-through processing (STP) will be crucial for managers to meet the new tightened deadlines.
Our FX solutions cover all forms of demand, ranging from multi-venue to single dealer. And they can help meet newly compressed deadlines for T+1 by employing electronic price streams and our comprehensive suite of FX trading algorithms, in addition to independent, open-architecture analytics and reporting tools that measure shortfalls and trading costs across the trading spectrum. Make informed choices regarding liquidity providers, venues and execution strategies through the platform’s pre-trade, post-trade and peer analytics, helping you provide proof of best executions.
To see how our technology driven FX solutions can help, see here.
Securities Lending
The transition to T+1 is expected to impact the timing of the recall process. It is important to factor loan recall time into the cycle, along with the time taken to return any collateral held against the lending transaction.
A number of circumstances can affect recall times, such as timescales stipulated in the original lending agreement and liquidity of the loaned security. The reduced trade cycle of T+1 implies future securities lending deals should take these issues into account, with future trades in mind. Additionally, custodians and other trading services providers should be given more advanced information about trades involving loaned securities, wherever possible.
In addition to our agency lending services outlined below, we can offer direct and peer-to-peer lending solutions, that support reduced T+1 timescales with speed and efficiency driven by our electronic trading platform, large network of lenders and borrowers and cash collateral reinvestment solutions.
See our securities lending solutions here.
Secured Financing
For managers transacting across jurisdictions, shortened USD settlement cycles in comparison to other currencies and jurisdictions may present funding gaps that could trigger overdrafts. For example, under the new settlement regime, a manager selling a sterling asset to fund the purchase of a USD asset would not receive the proceeds from the sterling sale until T+2, but the USD purchase would require funding on T+1. This mismatch generates a one-day funding gap for the manager on T+1.
Access to liquidity to cover these mismatches can be acquired through our sponsored member repo offering provides access to highly liquid investment and financing at competitive rates with reduced counterparty credit risk. At the end of the second quarter of 2023, our total gross repo volumes exceeded US$320 billion, serving more than 150 clients across 16 eligible jurisdictions.
Our secured fund financing offers agency lending that allows for competitive pricing with respect to traditional overdraft facilities. Access cash from our balance sheet by pledging assets from your account. Securities are rehypothecated through agency lending performed in-house by our established agency program with robust operational safeguards, including dedicated counterparty risk management.
We offer a range of funding solutions to mitigate this problem, including sponsored repo, and our secured funding facility.
$320B
At the end of the second quarter of 2023, our total gross repo volumes exceeded US$320 billion, serving more than 150 clients across 16 eligible jurisdictions.
ETF Servicing
Shares in ETFs typically take longer to settle than most equities and other liquid securities as they involve the transfer of the underlying securities that make up the index, which the fund’s portfolio tracks. Specifically, these include products that have local emerging market exposure or funds with highly illiquid asset classes. In some cases, these securities can be listed across different time zones and jurisdictions, generating added complexities and requiring collateral to be posted a day earlier.
This complexity is best managed with a full service set of ETF solutions including:
- Customized basket creation, calculation and dissemination, along with fully automated processing and straight-through processing processing for rebalancing and restricted trades
- Transfer agent capability in many jurisdictions, which verifies that ETF units are reconciled to the Depository Trust & Clearing Corporation daily
- Risk and portfolio accounting systems for data transfer for our partners, and market-leading trade order management
State Street offers a full range of ETF servicing solutions.
Corporate Actions
Clients and investment managers will need to be aware that trading close to the market expiration on a voluntary corporate action may result in a shorter window to make the desired election to participate in the corporate action. In the T+1 environment, ex-date and record date will fall on the same day for dividends.
10%
State Street is a leading financial services provider. Every day, more than 10 percent* of the world’s assets flow through our doors, so we see what others can’t. With deep insights into macro and regulatory trends, we’re well-prepared to support you in all aspects of T+1.
“With the right tools and solutions, managers can facilitate T+1 compliance and capture business enhancements across their workflows through technology and automation.”
$320B
At the end of the second quarter of 2023, our total gross repo volumes exceeded US$320 billion, serving more than 150 clients across 16 eligible jurisdictions.
Better operations and provider solutions across this range of processes and business areas can be potentially transformational to organizations that embrace the changes that T+1 requires of them.
To realize these efficiencies and benefit from faster, more efficient trading operations, investment managers should:
- Analyze metrics (e.g., trade volumes, fail rates, allocation rates, affirmation rates). The baseline metrics should be used to understand the size/volume of any specific process.
- Look to add automation for manual operational activities wherever possible, including via available custodian, vendor and/or market infrastructure solutions
- Assess resource needs for changes and working hours adjustments for internal and external stakeholders with primary operations outside of North America.
- Consider relationships with third-party providers within the trading ecosystem and ensure they have the systems and processes that can help to drive these improvements in institutions’ internal operations.
For a summary of all the ways State Street can help with T+1-related challenges, see our comprehensive interactive T+1 solutions document.
Making Preparations Ahead of North America’s Shift to T+1
Watch The TRADE speak to Andrew Kovacs, Director of Product, EMEA, about client readiness for the shift to T+1, the value of artificial intelligence for the buy-side trading desk and the ongoing trend of investments being made into alternative asset classes.
That’s Settled: The T+1 Growth Opportunity
Watch how we’re well-positioned to support your shift to T+1 by offering a range of advanced services. Finding the right partner is crucial to help ensure readiness, manage risk and avoid failed settlements.
Achieving T+1 Settlement
Read how State Street and Charles River are supporting our clients with offerings that help manage the move to T+1. This interactive PDF that covers T+1 capabilities across all business lines, including custody, FX, and post trade offering.
State Street Office Hours: How T+1 can optimize workflow through technology
View this session on how investment institutions can drive growth through technology-led workflow optimization, as they adapt to the T+1 settlement rule for North America and Canada.
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