As a capital market industry practitioner for more than 30 years, I often engage with the industry and speak at events on a number of topics including the upcoming US transition to T+1 on 28 May 2024.
From my recent speaking engagements and conversations with clients, it was good to hear that APAC firms who have US-based trading counterparties are aware of the US move to T+1, and most have spoken with their brokers and custodians to form a plan of action for the upcoming transition.
Related: Know your T+1 blind spots
For those firms with a high volume of US trades, many have embarked on a holistic review across systems and processes and have identified enhancements to meet compressed settlement timelines. Others, particularly those with lower volumes, are considering making necessary changes after assessing the actual impact of T+1 post-transition, which could make compliance more challenging.
As this industry is less than one month away from T+1 implementation, firms must consider their keys to success to ensure a smooth transition, including testing, understanding the US affirmation process, and preparing for the upcoming implementation weekend.
Ensuring a Smooth Transition
When the US Securities and Exchange Commission (SEC) adopted the new rules, it stated that institutional trades must be allocated, confirmed, and affirmed as soon as technologically possible and no later than end of trade-date, referred to as Same Day Affirmation (SDA).
For the APAC region, SDA would loosely translate to completing pre-settlement matching on trade date, which is already the norm in both China and India, and which would be a must-have for any market contemplating to accelerate their settlement cycle.
While achieving a higher SDA rate may have been challenging a decade ago, there are automated technology solutions already available to help firms successfully achieve SDA to ensure timely T+1 settlement.
Related: Analysis of the industry’s affirmation progress ahead of T+1
Understanding the Role of Affirmation
In US post-trade processing, affirmation is a critical step in facilitating settlement. Affirmation signifies agreement between the investment manager and the broker on the trade details as a precursor to settlement.
The buy side affirmation task is performed by an institutional investment manager or delegated to a custodian or prime broker to agree to the trade confirmation details sent by the broker. The affirmed trade then activates the delivery of settlement instructions to the US depository, the Depository Trust Company (DTC). This process is akin to the pre-settlement matching or pre-matching workflow in APAC.
In view of the shortened settlement timelines, non-US investment management firms must engage their custodians and/or prime brokers on which party and which workflow will best position them to complete the affirmation process as quickly as possible.
It is important to note that to achieve SDA and T+1 settlement timelines, DTC recommends trade allocations be done as soon as practicable but no later than 7:00 PM Eastern Time (ET) on trade date, and the US T+1 Industry Steering Committee recommends trade confirmation and affirmation be completed by 9:00 PM ET on trade date (T). Doing so will provide sufficient time for managing exceptions ahead of the T+1 settlement deadline.
Given that custodians will have a separate set of deadlines for pre-settlement processing before the allocation and affirmation cutoff times, non-US investment management firms will need to adjust their internal operations and associated systems by leveraging straight through processing to meet these recommended deadlines as well as to allow for sufficient time to address and resolve pre-settlement exceptions. As such, removing manual processing and human intervention in the processing of trades will be a crucial part of the T+1 equation.
Dotting the I’s and Crossing the T’s
As the countdown to May 28 continues, there are a few helpful reminders for non-US investment management firms:
- Collaborate with your regional and US brokers and prime brokers on the changes needed to enable them to comply with the SEC’s amended rules on meeting SDA requirements.
- Discuss with your custodian(s) suitable affirmation models, for the immediate and longer term, as well as assess the potential impact on corporate actions.
- Determine how funding and foreign exchange (FX) transactions should be processed and work with your custodians and FX providers to find the optimal funding and FX solution, including FX conversion timing.
- Agree with your intermediaries on the timing of recalls and a fallback mechanism, should a recall not be met on time for firms involved in securities lending activities.
- Ensure that you meet the Amended Advisers Act Rule 2024-2 by keeping records of confirmations received, and allocations and affirmations sent, complete with date and time stamp – a requirement for U.S. SEC registered investment advisers.
- Confirm with your system providers that their processes and support are ready to manage the changes required for T+1 and that workarounds are in place to quickly address operational issues, if any.
Preparing for the T+1 Conversion Weekend
To ensure a smooth switch to T+1 on 28 May 2024, DTCC has published a comprehensive T+1 Conversion Guide detailing the steps DTCC will take during the T+1 conversion process, along with changes that will be effective upon implementation of the T+1 settlement cycle.
The guide includes materials on DTCC’s timeline to convert its production environment from T+2 to T+1 settlement cycle, details systems and processing changes for T+1, and shares information on client support during the T+1 conversion period.
The guide also notes that organized securities exchanges (NYSE, NASDAQ) and FINRA have agreed not to rule 28 May 2024, as an Ex-Date for corporate action distribution events to avoid complicating the migration process.
Awakening Date
28 May 2024 is not the end date for T+1 preparations; rather it is an awakening date for all of us to fully appreciate the magnitude of the impact and benefit that accelerated settlement brings. We are all working incredibly hard to make the conversion weekend as successful as possible while also being prepared for contingencies.
As we approach the tail end of the T+1 preparation journey, firms should ensure readiness and be prepared to handle the potential spikes in trade exceptions and fails during the transition. The T+1 implementation date for the US is right around the corner – the time to finalize preparations is now.
This article was originally published to Regulation Asia on April 30, 2024.