With US T+1 implementation fast approaching on 28 May 2024, investment management firms now have less than four months to make crucial decisions concerning their post-trade pre-settlement process. The more automated and efficient this part of the trade processing chain is, the greater the likelihood that a trade will be able to settle on T+1. As firms advance their readiness, they must understand and act in the following seven areas to ensure preparedness.
Related: Strategies for Accelerated Settlement in the UK and EU
First, investment managers must decide how to make their trade allocation process as efficient as possible. After a trade has been executed, buy-side market participants allocate block trades to underlying accounts and send those details to their executing broker. Upon completion of the allocation process, each trade is confirmed by providing a detailed record of the transaction, including what was traded, the date of the trade, the cost, and the net value. Currently, many buy-side firms submit significant portions of allocations after the US close and concentrated in a 2-hour window. Firms must assess how they can accelerate the allocation process to make U.S. deadlines. At the same time, after T+1 is in place, investment managers should consider implementing an intra-day allocation model which involves automating the allocation process.
Second, investment managers must closely evaluate their trade affirmation process, during which the details of the transaction are affirmed by the investment manager or their designated custodian. Investment managers will need to decide whether to outsource this activity to the custodian or whether they want to take on the accountability of conducting this process themselves. In the US, trade affirmation, which enables institutions to affirm broker confirmations, is a critical part of trade processing. Within the T+1 settlement cycle, this process will need to be completed by 9pm ET on the trade date in order to settle via the most efficient workflow at DTCC, allowing minimal time for exception handling.
At present, there are no penalties for affirmation not taking place by 9pm. However, with the implementation of T+1, trades that are not affirmed by 9pm on trade date will be processed in the next day’s day cycle, which is far more expensive than the night cycle. Therefore, investment managers will need to consider how time zones may impact their post-trade capabilities and whether they will need to work with an outsourced provider to meet the requisite deadlines and, if so, how those services will be provided to them.
Difficulty with Omnibus Accounts
Third, investment managers must understand their affirmation rates. In the US, this is not always straightforward, as many custodians work on an omnibus account structure which makes it difficult to assess the affirmation performance of individual investment managers. To address this issue, DTCC has partnered with several custodians to encourage investment managers to obtain their own TradeSuite ID vs using their custodian’s ID, a practice commonly occurring today especially with investment managers outside of the US. This will enable the identification of the underlying investment manager, as well as provide them with a better view of their overall affirmation rates.
Fourth, investment managers should understand custodian cut-off times, as most custodians have cut-off times considerably earlier than those at NSCC and DTC. In Asia, for example, market participants have the following morning to perform the affirmation process. In Europe, that is not necessarily the case. Therefore, market participants must understand custodian deadlines and decide now how they will approach time zone coverage and whether they will require a third-party to perform the affirmation process for them.
Fifth, investment managers should explore and adopt standardized and automated standing settlement instruction (SSI) solutions. Accurate SSIs guarantee that trade settlement instructions are sent for the correct settlement accounts. However, because SSIs are data points that change from time to time, firms not leveraging an automated SSI service from a golden source run the risk of using out of date data. Inaccurate or incomplete SSIs are one of the primary reasons for settlement fails. Automation of SSI enrichment from a golden source data set in the post-trade process ensures that standing settlement instructions are always up-to-date and accurate, which in turn facilitates timely and accurate settlement.
The sixth step investment managers should consider is leveraging a workflow that streamlines what is currently a multi-step process of allocation matching in the middle office and then confirmation affirmation in the back office. By automatically triggering trade affirmation and the delivery of DTC-eligible securities directly to DTC for settlement when a trade match between an investment manager and executing broker is achieved, firms can accelerate the settlement process. In fact, firms who have adopted this workflow to match and affirm US trades are already approaching a 100% same-day affirmation (SDA) rate by 9pm on trade date according to DTCC data.
Finally, the seventh step is for the buy-side to play an active role in meeting the requirements given the amended recordkeeping Rule 204-2, which states registered investment advisors need to make and keep records of confirmations received and allocations and affirmations sent, each with a date and time stamp.
Good News
As the industry moves closer to the US implementation date of T+1, investment managers face crucial decisions on how best to increase the efficiency of post-trade processing to ensure timely settlement. The most important decision to make from the outset is to evaluate whether the trade affirmation, allocation, and matching processes should be managed in-house or whether it is better for this function to be outsourced to a third-party provider. The good news is that automated post-trade solutions are available today and are already delivering risk mitigation, as well as operational efficiency benefits, to market participants and the industry at large.
This article was published in Funds Europe on February 26, 2024.