T+1 Operational Impacts: Today and Beyond

On February 9th, 2022, the Securities and Exchange Commission (SEC) proposed to shorten the current two-day trade settlement cycle (T+2) to a one-day trade settlement cycle (T+1). The DTCC and key industry participants have been actively preparing for this initiative to shorten the trade settlement cycle. Trade Date + 1 settlement will remove half of the time allocated for trade settlement with the benefit of reducing credit risk. It is the next logical step in modernizing the trade settlement cycle as market risk and capital requirements will be reduced and operational efficiency will improve with the shorter amount of time allowed to settle the trades.

The transition to a one-day trade settlement cycle will be an industry-wide exercise, requiring early and precise planning to achieve a seamless transition. Currently planned to take effect on May 28th of 2024, it will be critical for firms to be proactive in the next year to make the necessary operational and technological enhancements within their organization with the goal of sustainably meeting the demands of T+1 settlement and aligning with all market participants. Firms should be actively planning for the transition in throughout 2023 as industry testing will begin in Q3 2023.

The security settlement cycle has greatly evolved over the past 50 years and the pace at which the industry is evolving is only accelerating. Between 1976 and 1995, the industry utilized a trade date plus a five-day settlement cycle (T+5). The industry moved to reduce the trade settlement time to two days (T+2) in the fall of 2017.

Many parallels can be drawn between the implementation of T+2 and the planned implementation for T+1. The financial services industry began preparing for T+2 in June of 2015 with a target implementation date of September 2017. A detailed playbook was published by the DTCC in December of 2015. Testing began in early 2017 prior to the final implementation deadline of September 5, 2017. The transition to T+2 required a massive industry effort and leadership and was a tremendous success in aligning front office, middle office, back office, legal, technology and compliance functions. The immediate benefits to process improvements, trade settlement and industry alignment received after the T+2 transition spurned industry-wide discussion about the potential benefits of a T+1 accelerated settlement structure.

Throughout 2020 and 2021, SIFMA and the DTCC worked to analyze the future impacts of a T+1 settlement cycle, with the transition framework being laid out in December 2021. A comprehensive playbook was released in August 2022. Firms are expected to build, develop and test internal capabilities in 2023. Formal industry testing will begin in Q3 2023 in anticipation of an implementation date of May 2024 based SEC Ruling.

Q1 2023

Throughout 2022 and the first quarter of 2023, firms have been familiarizing themselves with the finalized T+1 requirements and industry best practices presented in the DTCC T+1 Securities Settlement Implementation Playbook. The Playbook is the best tool to understand the scope and intricate details of the push to implement T+1. Working Group sessions are currently being held monthly throughout 2023.

The DTCC has released the T+1 Test Approach in order to supplement their playbook for the industry which outlines the general scope and key considerations for testing. Individual systems and processes are discussed and the DTCC has released their formal testing guidelines. Q2 and Q3 of 2023 is a recommended period for education and preparation. Firms should be able to perform a detailed analysis on current systems and begin planning for the migration to T+1.  Firms are able to perform a GAP analysis on any current limitations and game plan potential solutions. For instance, a defined testing plan should be prepared and developed so testing and coordination with regulators can be launched during 2023. Current and legacy systems should be assessed during this period as well as potential impacts to existing procedures.

In Q1 of 2023, firms should be finalizing implementation plans. The focus of the first half of 2023 will be to design and build the means necessary for T+1 transformation. The primary focus should be to assess effects on the firm’s current operating model and individual products. An internal roadmap should be developed as firms will need to assess and plan for any changes required for current policies and procedures as well as build tech systems and upgrades. This process would require an impact assessment of current capabilities and where firms may need to update systems.

Updates to the DTCC and ISC guidelines should be monitored in case there are any formal changes to the T+1 roll-out plan. Firms should be mindful of the costs of the T+1 transition in their budgeting for 2023 and 2024.

Q2 – Q4 2023

In 2023, Firms will need to focus on implementing their plan for T+1. Internal analysis on legacy systems and processes should be completed earlier in the year in order to move forward with process automation in order to ensure a smooth transition. Internal committees should be formed in order to steer the transition efforts and educate key stakeholders on the urgency of this regulatory and procedural change. Risk and compliance areas should be monitored during this period to anticipate any future challenges. Any new internal tools should be developed towards the beginning of 2023 so the tools can be tested appropriately near the end of the year.

Coordinating with regulators and ensuring firms’ systems can fully operate on a T+1 settlement cycle will need to be continuously executed throughout 2023. Regulators have coordinated with the industry to develop a roadmap for regulatory impacts of the transition to T+1 and lay the groundwork for testing. System implementation will need to be completed during this period in anticipation of vigorous testing. An industry wide effort will take place as industry and regulators will conduct rigorous testing in order to assure firms are prepared for roll-out in Q2 2024. The formal testing phase is expected to last nine months beginning in October 2023.

The formal testing phase will be preceded by internal testing where firms will have the ability to utilize the testing platform and ensure firms’ systems are fully operational for T+1 by the end of 2023 in order to make the formal testing phase less demanding. Firms must assess internal capabilities to host a testing environment. Impacts to data flow and processes should be assessed during this period prior to formal testing. The results of internal testing will call for swift action to amend any short-comings and risks prior to formal testing. Internal testing should conclude towards the end of Q3 2023.

Q1 & Q2 2024

The migration date for accelerated settlement is May 28, 2024. Stakeholders will review industry participant feedback and set up a T+1 Command Center to circulate formal announcements and assist stakeholders with any issues. Through extensive effort and planning in 2023, firms should be well prepared for the ramp-up towards formal T+1 launch in May 2024. Firms will have already conducted internal testing and will know where they stand prior to formal testing. Formal industry testing is expected to conclude in the middle of Q2 2024. DTCC will use their existing test environment which was used during the T+2 implementation. Regulators will set the formal window for testing, but the testing period is expected to take nine months. A defined testing plan was released in Q1 2023. Some key testing considerations which have already been discussed by the DTCC are specific securities, double settlement days, holiday testing and trade platform testing. These areas covered are important as it gives firms a view into how formal testing will be conducted.

After extensive industry testing, the formal industry implementation will be on May 28, 2024. The T+1 Command Center will be able to assist on any immediate issues related to the transition. Metrics and reporting will be established for industry feedback during this period. All members of the financial services industry are expected to be fully prepared for the transition to T+1 by the formal implementation date.

Firms can be proactive in their preparation for T+1 settlement in 2023 in anticipation of testing and implementation. Financial service firms should currently be in the impact assessment phase. There should be an emphasis within firms on finalizing requirements gathering. The next year should consist of designing, developing and building out a plan for implementation as well as internal testing.

In 2023, Firms should set up an internal command center for T+1 to coordinate the effort to make the transition. Internal working groups should be set up across business functions to provide regular updates on process enhancements and areas where business units are struggling. Vendors must be assessed to see if current and legacy systems have the capability to settle trades within a one-day window. Continuous communication with Vendors will also be crucial throughout the T+1 transition. Internal procedures will need to be reassessed to account for T+1 transformation and impacts. Current policies and procedures should be reviewed to see where updates are required. Preparation should be made for the internal testing environment which will be utilized in 2023. Firms should be actively assessing risk when evaluating how the change will impact the firm in order to be ready to limit operational risk throughout the transition to accelerated trade settlement.

Process improvement and automation, aided by technology, will play a significant role in helping member firms achieve compliance with the proposed accelerated settlement cycle. Planning for areas of automation in the impact assessment phase will make the transition smoother. The transition to T+1 will require firms to evaluate not only all internal processes and system capabilities, but also those activities aided by third-party vendors and service-providers.

Sia Partners has been proactively anticipating the pending shift to T+1 trade settlement and can work to build an effective framework for our clients. Sia Partners’ membership in SIFMA has allowed Sia Partners leadership to interact with key stakeholders at the forefront of the push to accelerate the settlement cycle. Sia Partners has been monitoring the shift to T+1 since the beginning of the initiative and attends key meetings to remain updated and educated on all new developments.

Sia Partners is currently assisting clients establish enterprise-wide governance for T+1 implementation. We have extensive experience leading large-scale Business, Technology, and Regulatory transformational projects across the Financial Services Industry. Additionally, Sia Partners has helped our clients meet the demands of similar trade acceleration initiatives - designing a comprehensive and effective gameplan, identifying impacted areas, enhancing processes, and providing technology solutions.

We welcome the opportunity to partner with you on major strategic and operational initiatives, providing a variety of solutions to meet all of your business needs.