The securities financial services industry has embarked on a significant transformation with the transition to a T+1 (trade date plus one day) settlement cycle. This shift promises to enhance market efficiency, reduce counterparty risk, and improve liquidity. However, the move to T+1 also presents a series of complex challenges for post-trade participants, particularly in the realm of core systems technology. Yet, in adversity lies opportunity. By addressing these challenges head-on, organisations can not only comply with market demands but also gain a competitive edge, suggests ERI’s Alan Goodrich. Find his advice here.
By Alan Goodrich, ERI
The move to T+1 aims to reduce the time it takes for trades to settle, minimising counterparty risk and enhancing liquidity. While the intention is to create a more efficient marketplace, post-trade participants, including broker-dealers, custodians, asset managers, and transfer agents, face significant challenges in adapting their core systems to accommodate the new timeframes and flows of information.
Key challenges related to core systems
1. Increased processing speed requirements
Transitioning to a T+1 settlement cycle necessitates drastically shortening processing times. Existing core systems may not be equipped to handle the accelerated data flows, requiring enhancements or complete overhauls. Institutions must ensure that their systems can process trades, confirmations, and settlement instructions – in a matter of hours, if not minutes or seconds – rather than days.
2. Data integration and accuracy
As trading activities become more time-sensitive, the importance of accurate and timely data cannot be overstated. Core systems must seamlessly integrate with multiple data sources and provide real-time visibility into trade status. Any lag or error in data entry could result in costly delays or financial penalties.
3. Legacy thinking & system limitations
Many financial institutions still rely on legacy systems that were not designed for rapid processing and real-time interactions. Upgrading or replacing these systems requires not only significant financial investment but also a cultural shift within organizations that may have become accustomed to longer settlement periods.
4. Regulatory compliance
Compliance with new regulatory requirements associated with or potentially impacting T+1, such as DORA and the proposed FiDA regulation in the EU, introduces additional layers of complexity. Firms must ensure their systems adhere to evolving regulations while still delivering timely settlement capabilities. Failing to meet compliance standards can lead to sanctions and reputational damage.
5. Operational readiness and scalability
The transition to T+1 requires operational readiness, which involves retraining staff, restructuring workflows, and updating processes. Firms must ensure their core systems offer the scalability needed to handle increased transaction volumes under the new settlement timeline.
Turning the challenges into competitive advantages
While the challenges posed by the T+1 settlement cycle are significant, they also present opportunities for post-trade participants willing to adapt and innovate. Moving to a modern, integrated core system designed for real-time processing could be a game-changer. By investing in technology that enhances speed and efficiency, as well as providing simplified access to a single data source and version of the truth, institutions can not only meet T+1 demands but also position themselves as leaders in operational excellence.
1. Leveraging data analytics
Enhanced data analytics capabilities enable firms to optimize their post-trade processes. Real-time insights allow institutions to make informed decisions quickly, thereby reducing risks and ensuring compliance while driving efficiency.
2. Improving client experience
A fast, efficient settlement process enhances client satisfaction. By leveraging modern core systems to improve responsiveness and transparency in post-trade operations, firms can create a competitive differentiator that attracts new business, retains existing clients and deepens relationships.
3. Agility and flexibility
Firms that successfully migrate to T+1 will possess the agility to respond swiftly to market changes and client needs. This flexibility can be a key selling point, allowing institutions to adapt their offerings or services more effectively than competitors who struggle to evolve.
4. Collaborative ecosystems
Collaborating through Open APIs with complementary technology solutions can facilitate the development and implementation of innovative solutions that enhance core systems. By fostering these partnerships, firms can integrate new capabilities, mitigate risks, and manage the costs associated with the transition to T+1.
5. Enhanced risk management
Implementing robust ex-ante as well as ex-post risk management protocols within core systems can provide a competitive edge. Firms that build resilience into their operations are better positioned to navigate marketplace volatility, ensuring that they can settle trades efficiently even during unforeseen disruptions.
Conclusion
The transition to a T+1 settlement cycle presents significant challenges for post-trade participants, particularly from a core systems perspective. However, firms that strategically address these challenges can turn them into competitive advantages, setting themselves apart in a rapidly evolving marketplace. By investing in modern technology, financial institutions can position themselves successfully for this paradigm shift. Embracing T+1 not just as a compliance requirement, but as an opportunity for innovation, efficiency, and enhanced service delivery, will ultimately determine the winners in this new fast and furious environment.
Alan Goodrich
Regional Sales Manager at ERI
Fellow of the IAP (Institution of Analysts & Programmers)
Alan has 30+ years of experience in finance and technology, with expertise as a Fellow of the Institution of Analysts and Programmers and a General Registered Representative of The Securities Association. He’s held senior roles in leading financial firms and technology suppliers. Currently, he serves as Regional Sales Manager at ERI, overseeing Benelux, Nordic, Baltic, and SEE territories.
ERI is the supplier of the OLYMPIC Banking System, offering award-winning levels of innovation, real-time securities processing automation and compliance.