As the May 2024 deadline for T+1 approaches for industry players in the US and Canada, fund managers are having to face their pain points in the transition, writes editor Chris Kentouris in an in-depth piece on FinOps Report. According to accounts from several industry insiders, post-trade communications, securities lending, liquidity management, and corporate actions are the main issues of concern that are keeping fund managers awake at night.
Currently, at least 20 percent of trades are affirmed only the day after they have been executed, claims Chris Kentouris. This, he writes, is sufficient under a T+2 schedule, but not T+1. For the latter, all trades will have to be affirmed by 9pm EST on the day they are executed.
The ones who stand to lose most in cases of settlement fails are the investors. The article quotes David Smith, managing director of capital markets practice lead at Broadridge Consulting Services: “Unlike the case with Europe’s Central Securities Depository Regulation (CSDR) which requires European securities depositories to fine member banks and broker-dealers for not settling trades on time, US regulations do not call for any mandated penalties other than clean-up costs.” If settlement fails rack up costs for fund managers, investors will suffer lower potential return on investment.
Chris Kentouris points out that challenges only multiply for those involved in the international markets. Earlier deadlines for post-trade communications will be difficult for buy-side firms in Europe and Asia Pacific to meet due to time zone differences. One solution is for fund managers to use a central matching service, such as the US’ Depository Trust & Clearing Corporation (DTCC) central trade matching (CTM) platform. Such systems are able to automatically trigger trade affirmation and delivery of securities to the US’ securities Depository Trust Company (DTC) for settlement.
Man and machine
The article concludes that ultimately, reducing settlement fails will come down to succeeding at three main tasks – accurate data input, real-time communication, and quick correction of mistakes.
Kamal Kannan, business transformation manager for securities services at S&P Global Intelligence, recommends that fund managers automate the flow of information between their front and back offices, and to their custodian banks. But automation isn’t the be-all and end-all. As Daniel Viola, partner and head of the Regulatory and Compliance Group at law firm Sadis & Goldberg points out, “There still needs to be enough manual intervention to correct mistakes.”