Market infrastructure provider Vermiculus and capital market research firm GreySpark have announced an article series that will look at effects of T+1, one year after implementation. The first article, published today, examines the immediate effects of the transition, and the challenges and benefits that have emerged. Taken as an entirety, the series aims to shed light on the operational, technological, and infrastructure implications that T+1 has had for exchanges, clearinghouses, and CSDs.
The study quotes a Bloomberg analysis that reveals the cost of the US transition to T+1 to have been US$30 billion. The figure covers “system upgrades, operational restructuring, and comprehensive staff training programmes”. Because of the extensive investment in straight-through processing (STP) and automation, the concern that T+1 would cause an increase in settlement fails never materialised. In fact, Continuous Net Settlement (CNS) fail rate on the first day of implementation was 1.9 per cent, lower than that for T+2 settlements in the same month – May 2024. Same-day affirmation rate achieved by asset managers was 97.5 per cent, up from the 92 per cent seen in January 2024, before the transition.
Newly critical
“For custodians, broker-dealers, and asset managers, exception management has emerged as perhaps the most critical vulnerability in the T+1 settlement process,” states the paper. With the compressed timeline, firms have had to reconsider their exception handling procedures. “Traditional sequential approaches, when one step of the process must be complete before the next begins, are no longer viable. In lieu, parallel processing through automated workflows has become essential to meet regulatory requirements.”
Data quality has become of “mission-critical concern”. The result is the implementation of “stringent data governance frameworks and validation processes” aiming to “prevent the potential cascading settlement risks that could result from data discrepancies”.
The good and bad
According to data from the Depository Trust and Clearing Corporation (DTCC), shorter settlement times have translated into a 28 per cent decrease in clearing fund requirements. Requirements fell from US$12.8 billion to US$9.2 billion in the quarter after T+1 came into force. “This reduction directly frees US$3.6 billion in capital that was previously committed as collateral, allowing financial institutions to deploy those resources more productively, increasing overall market liquidity,” the paper claims. Additionally, the credit risk exposure window has dropped by approximately 41 per cent.
Unfortunately, the T+1 transition has probably gone smoothly only for “large asset managers with sophisticated, well-established technology infrastructure”. The paper hypothesises that these firms have been able to adapt “without requiring major additional investment beyond what they had already planned in their technology roadmaps”.
For smaller buyside firms, it’s a different story. They were likely “pushed into rapid, expensive technology modernisation initiatives in order to comply with T+1 requirements”. Should smaller firms be unable to afford these high technology costs, the paper predicts accelerated market consolidation.
Some trading approaches are also facing more pressure than others due to their nature. Short selling in the US requires brokers to have located a source of shares to borrow before the sale. Loaned securities must be recalled earlier, by 11:59 on trade date instead of 15:00 on T+1, “potentially reducing the overall pool of borrowable shares available in the market”.
Do this, not that
The paper identifies four best practices in the T+1 trading environment: pre-positioning of assets, real-time trade matching, predictive analysis, and strategic securities lending.
In particular, it highlights equity loans as “a fail-safe mechanism to avoid settlement failures”. “Brokers and custodians, serving buyside clients, rely on securities lending arrangements to cover potential settlement shortfalls, particularly where there is an identified risk of settlement failure.”
