T+1 settlement transition: Checking on the pace
With go-live approaching in 2024, the clock is ticking on the move from a T+2 to a T+1 settlement cycle in the US and Canadian capital markets. Trading in a wide array of products—equities, mutual funds, REITs, corporate and municipal bonds, equity derivatives, and more—will switch to next-day delivery of the cash or securities. Any bank that fails to be ready by the deadline will face severe impacts on its business.
But as the industry-wide switchover draws nearer, questions remain:
During July 2022, we’ve surveyed 100 executives across the US, UK, and Canada from 73 capital markets firms engaging in trading or custody of US equities or US fixed-income securities. Our goal was to understand firms’ current stage on the journey to T+1 and beyond, as well as to garner their views on the role of AI and automation when transitioning to T+1.
We think the findings are an interesting read for every capital markets executive, providing insight into several vital aspects of the transition.
Asked what steps their firm has taken to date to prepare for the T+1 transition, 75% of respondents to our survey said they’ve already completed a high-level assessment to evaluate the degree of T+1 impact, enabling them to identify the key focus areas. Almost two in five—39%—have however yet to mobilize their formal T+1 program.
But an overwhelming 94% of respondents are confident their firm will have the proper infrastructure in place by 2024. This strong industry-wide confidence about meeting the timeline underlines, in our view, that the move to T+1 has solid leadership and organizational support, with little resistance remaining. The transition may not always be a simple undertaking, but market participants seem to have largely accepted the need for it.
What steps has your firm taken to date to prepare for the T+1 transition?
While the T+1 transition is happening, in our experience and from our research data, it’s mostly the bigger firms who are more advanced in their T+1 programs, and smaller ones that might be still at the assessment stage. Overall, our research suggests that most firms are just about in line with the industry timelines for the transition, yet we would caution firms to intensify their efforts now to not risk rushing development or testing at a late stage of the transition.
Which area of the bank will lead the T+1 transition? Opinions in our survey are sharply divided. When asked this question, 41% of respondents said they believe technology will take the lead, a figure rising to 75% among heads of equities technology. Conversely, 40% of all respondents – and 71% of heads of equities operations – think operations will lead the transition.
Which area of the bank will lead the T+1 transition
of all respondents said they believe technology will take the lead.
of heads of equities technology believe technology will take the lead.
of all respondents think operations will lead the transition.
of heads of equities operations think operations will lead the transition.
The implication? Executives are focusing primarily on their own function’s role and impact in the T+1 transition. But where they agree is on the need for centralized coordination of the program, with 93% of respondents agreeing that the transition will require significant change and project management efforts. The message for firms is rather clear. Whichever functional group may be leading the T+1 transition, success will depend critically on establishing a central project and change management office to develop project milestones and monitor progress, raise risks with leadership and ensure the program keeps pace with timelines.
An equally important aspect of the central project and change management team’s role will be ensuring strong firm-wide awareness of the required change. Positively, 95% of our respondents agree their organization is aware and well-informed on the changes needed. However, we would caution that it’s important to avoid complacency on this issue—and to learn lessons from previous comparable changes.
For example, during the transition to T+2 in 2017, we observed issues arising in the final run-up to go-live within some firms. To avoid this happening, it would be important to plan and execute a carefully considered change management strategy around the transition to T+1. This should consist of training, communication, upskilling and adoption elements, to ensure every party involved—both internally and externally, including counterparties—feels well prepared and fully aware of how the transition will impact their day-to-day work.
Many firms have started to prepare for the T+1 settlement cycle, but might be underestimating the time, cost and effort required to enable T+1.
Our findings on firms’ adoption of artificial intelligence (AI) and automation are among the most revealing of all. On the surface, it appears that our respondents are well-advanced in embracing these technologies: an overwhelming 83% claim automation is already embedded and optimized in their post-trade processing, and 73% say the same about AI. This would appear to indicate that most firms are well-placed to harness these technologies to enable a smooth transition to T+1.
But other findings suggest that, in many cases, this confidence might be misplaced. For example, 34% of respondents say as well that at least 50% of their trades are still manually touched at some stage during processing. This level of manual intervention is much higher than we would expect with optimized AI and automation being in place.
In fact, T+1 presents firms with a golden opportunity to enhance their post-trade processing capabilities through investment in modern technologies. AI and automation solutions are already prevalent in many institutions as they attempt to increase STP rates, but there seems to still be some way to go to realize their full potential to support T+1 settlement. In our view, effective use of AI and automation could be the key differentiator that will set market players apart under T+1. To get a head-start here, firms could create an inventory of manual processes across the end-to-end trade lifecycle and identify where automation uplift will have the greatest impact.
Our experience in running Accenture Applied Technology and Operations for Markets (ATOM), a trade processing service for banks and capital markets firms, has provided us with an opportunity environment to develop advanced AI and Machine Language tools, with capabilities like predicting fails and resolving errors in standing settlement instructions (SSIs).
What will moving to T+1 cost in money? A fairly modest amount, according to the respondents in our survey: Around 2 in 5 respondents (42%) expect their firm to spend between $6 and $10m on the T+1 transition over the next few years. In our view, these estimates are too low—as underlined by a comparison to other large, enterprise-wide transitions, such as LIBOR.
What will moving to T+1 settlement cost?
Firms’ low cost estimates for T+1 may reflect respondents looking mainly at costs in their own function rather than the across the institution. But whatever the cause, we believe that firms should get more realistic about T+1 program costs, which we would expect to be in the range of $30m to $50m a year over the three years for large financial institutions. And while investment in optimizing artificial intelligence and automation tools may be significant part of these upfront costs, they could ultimately help enhance the client experience, reduce risk, as well as lowering the cost base in the long run.
While the transition to T+1 is currently dominating the post-trade agenda, firms are already thinking about what comes next—and specifically the progression to T+0 settlement (in whatever form it might come one day, be it intra-day or same day) and distributed ledger technology (DLT). Some 95% of respondents agreed that DLT will play an important role in the settlements process going forward, and 86% said their organization is already considering T+0 settlement in their current T+1 efforts.
T+1 is probably as short as settlement could go with the traditional post-trade lifecycle. Any move towards T+0 will most likely require fundamentally different infrastructure, technologies and thinking. But our research confirms that firms see the eventual transition to T+0 as inevitable—and are keen to identify what they can do now in their T+1 programs to help them get there. Please watch out for more content around this topic on our Capital Markets blog.