US T+1 to Accelerate Fintech Change

by James · October 24, 2022

SIP increases speed

Companies changing technology to meet a shorter settlement cycle for US stocks should take the opportunity to future-proof their tokenization and digital asset systems.

In February 2022, the US Securities and Exchange Commission voted to shorten the settlement cycle for US stocks from T+2, two business days after the trade date, to T+1.

Mack Gill, CEO and chairman of Torstone Technology, a financial markets post-trade technology company, told Markets Media that his personal thesis is that the necessary transformation will result in a launch pad for much fintech change.

Mack Gill, Thorstone Technology

“I am convinced of the convergence of T+1 and the growing need for a digital asset strategy,” he said. “Everyone knows that in the next couple of years they will need to manage some level of digital assets and there is no room for the status quo.”

Market participants have welcomed the move to T+1, which is designed to reduce credit, market and liquidity risk. In August this year, The Securities Industry and Financial Markets Association; ICI, Investment Company Institute, and DTCC, US Depository Trust & Clearing Corporation published The T+1 Securities Settlement Industry Implementation Playbook which assumes a transition in the third quarter of 2024, subject to final regulatory approval from the SEC.

Gill said there has recently been a shift to September 2024 and the Labor Day long weekend.

“There will be much more debate about this through 2023 and whether the date needs to be pushed to 2025,” he added.

To meet the target for the third quarter of 2024, the industry will have to conduct parallel tests in the first of 2024. Therefore, companies will have to spend the beginning of 2023 reviewing their technology and making decisions about what needs to be changed.

Gill said: “Organisations need to get going in 2023. They need to undertake a wholesale review of their operational flow and underlying systems.”

One reason for a possible delay is that the change is greater than most people realize that it affects more than just technology. Although T+1 shortens US stock settlement, it will have an impact in many other areas, including corporate actions, securities lending, cash management and security.

“I think the most interesting change we might have is T+1 … there are a lot of workflow changes there, which could lead to a drive for more automation between the middle office and the front office.” – Bob Cioffi, @iongruppe #STADC2022

— SecurityTradersAssn. (@STA_National) 13 October 2022

In addition, Gill argued that medium-sized and smaller organizations in the US still carry out a lot of manual processing internally and will be most in need of change.

Foreign influence

Gill said there is one too growing recognition of the scale of the transition to T+1, including outside North America.

“Everyone in Europe and Asia has North American exposure and flow,” he added. “This is a regulatory change with global impact.”

India has recently moved to T+1 while mainland China already operates on T+0 – but on a net basis, according to Gill. As the US shortens the settlement cycle, many Asian businesses will need to pre-fund their trade due to the time difference which will require changes to their workflows.

Gill expects that Asia and Europe will eventually follow the transition to T+1, although Europe currently has other regulatory priorities such as CSDR, central securities regulations. .

Virginie O’Shea, Firebrand Consulting

Virginie O’Shea, founder of Firebrand Research, said in a report that there was discussion of the European perspective on T+1 settlement at the Sibos conference in Amsterdam this month.

“Regarding T+1, the panelists indicated that Europe currently has a higher number of errors than usual settlements and penalties related to the implementation of the final stage of the CSDR,” she added. “The discussion around a future move to T+1 or even beyond has therefore not been at the forefront of people’s minds, although some work has been done by AFME [Association for Financial Markets in Europe] to meet the challenges ahead.”

Real-time settlement

Although settlement moves to T+1, the ultimate direction of travel is towards real-time settlement according to Gill.

“Real-time processing and automation is the holy grail,” added Gill. “That’s where you want to be.”

He argued that if firms only adjust their current batch processing for T+1, they are likely to have higher failed trades resulting in higher operating costs, as well as penalties, and will also lose market share.

“The return on investment over the next 10 years is going to be huge,” Gill said. “There’s going to be a shakeout in the industry that matches the opportunities in digital assets and tokenization.”