T+1: The Investment Industry Prepares for Change

“Nothing is so painful to the human mind as a great and sudden change.”

Investment leaders are sprinting towards T+1, a revolutionary shift aimed at speeding up transactions. While the goal of faster, more efficient settlements is undeniable, it's important to acknowledge the potential challenges that may arise alongside this rapid change. However, with careful planning and a collaborative approach, T+1 has the potential to unlock a brighter future for the financial landscape.

The shift towards T+1 settlement cycles is a significant change for financial markets, aimed at reducing risk and enhancing operational efficiency. As European markets prepare for this transition, it becomes crucial to understand the requirements and collaborative efforts needed to achieve seamless integration and interoperability. From key milestones to technological advancements, key strategic action is essential to navigate this change effectively.

The Pathway to T+1 Settlements 

The transition to T+1 settlement cycles in the UK marks a pivotal change in the financial landscape. To achieve this goal, several official milestones and requirements need to be met:

Regulatory Compliance: The Financial Conduct Authority (FCA) will play a crucial role in setting the guidelines and timelines for the T+1 transition. Market participants must stay informed and align their operations with these regulatory requirements.

Technological Infrastructure: Upgrading legacy systems to support real-time data processing and settlement is essential. This involves investing in advanced technology solutions that can handle increased trade volumes and provide robust security measures.

Industry Collaboration: Successful implementation of T+1 settlements requires coordinated efforts among all market participants, including investment firms, brokers, and clearinghouses. Regular communication and collaboration will ensure that everyone is on the same page and can address potential challenges proactively.

Meeting T+1 Requirements in Europe

European market participants stand at the precipice of a significant change with the arrival of T+1 settlements. To navigate this transition smoothly and unlock the full benefits of faster settlements, embracing automation and technology is crucial.

Automating settlement processes is key to eliminating the burden of manual tasks. Leveraging automation frees up valuable human resources for more complex activities requiring judgment and expertise. Straight-through processing (STP) systems and real-time trade matching technologies are key tools that streamline the settlement process, minimising the need for manual intervention.

Think of data standards as a common language for all systems involved in the settlement process. By adopting consistent data formats and protocols, companies ensure smooth communication and information exchange between their systems and those of their counterparties. This reduces the risk of errors and delays that can occur when systems struggle to "understand" each other's data.

As automation takes over routine tasks, workloads will shift. Firms need to redefine team roles to reflect this change. Employees can focus their expertise on strategic activities that add value, such as exception handling, risk management, and client service. Automation handles the repetitive tasks, freeing up human capital for higher-level thinking and problem-solving.

Scaling T+1 Solutions Across Europe

The solutions established for the US T+1 deadline can be scaled and implemented across European geographies, benefiting from cost efficiencies. However, firms must address the following considerations:

1. Operational Capacity: Ensuring global operational capacity to cover 24-hour trading and settlement is crucial. This may involve leveraging outsourced capabilities to support continuous operations.

2. Global Coordination: Achieving a global T+1 settlement model requires coordinated efforts across different regions. Firms need to align their processes and timelines to ensure seamless integration. The

Pathway to T0 Settlements

Looking beyond T+1, the ultimate, long-term goal is to develop capabilities for real-time T0 trading and settlement. Achieving this ambitious objective involves identifying and overcoming major blockers, setting feasible timelines, and driving technological and data innovations.

The first step is identifying the major blockers that currently hinder the realisation of T0 settlements. These obstacles include technological limitations, regulatory challenges, and operational complexities. Addressing these issues will require a concerted effort from all stakeholders in the financial ecosystem.

Once T+1 regulations are firmly in place, firms can begin to assess the feasibility and timeline for moving towards real-time settlement. This progression will depend largely on technological advancements and the industry's overall readiness. Establishing a clear and realistic timeline will be essential for a smooth transition to T0.

Developing a T0 operating model will require significant innovations in technology and data management. Enhancing real-time processing capabilities and ensuring robust security measures are crucial components of this evolution. Firms will need to invest in cutting-edge technology solutions that can handle the demands of real-time trading and settlement while maintaining the highest standards of data integrity and security.

The Imperative for Buy-Side Firms

For buy-side firms, addressing new regulations like T+1 is not optional. Firms must find solutions to navigate this transition effectively. Key steps include:

Enhancing Technology: Investing in advanced technology solutions is critical to successfully navigating the T+1 transition. Buy-side firms should focus on adopting cloud-native clearing, settlement, and custody solutions.

Fostering Collaboration: Close collaboration with sell-side counterparties is essential to ensure seamless alignment of processes and preparedness for the T+1 transition. While the transition to T+1 settlement is a welcome development; it introduces short-term challenges. Firms must proactively prepare to address these challenges.

When it comes to finding the right solution, there should be short-term aims and long-term goals. In the short term, enhancing automation and achieving STP can help meet immediate T+1 requirements. Firms should also consider outsourcing compliance functions to specialised providers. However, investment leaders need to look ahead, and the answer seems to lie in technology.

Upgrading legacy systems, eliminating manual processes, and adopting a data-centric approach will ensure sustained success and resilience. Modernising systems and integrating operations across the trade lifecycle will drive efficiency and compliance.

In today's fast-paced financial markets, robust, efficient, and scalable systems are critical for trading companies. Legacy systems, built on outdated technology, may struggle to keep up with the demands of T+1 settlement cycles. Investing in modern platforms that support real-time processing and automation is essential for future-proofing operations.

Final Remarks

The transition to T+1 settlement is a significant step towards reducing systemic and operational risk in financial markets. By prioritising readiness, collaboration, and technology investment, market participants can navigate this transition successfully. Embracing modern infrastructure, automating processes, and de-siloing data will optimise settlement cycles, drive value creation, lower costs, and minimise risks.

In the evolving market landscape, proactive preparation and innovation will ensure a resilient and efficient financial ecosystem for the future. Join us at InvestOps in September for more unmissable insights!