Three months on, T+1 shows signs of success

After three years of preparation and just over three months after the official implementation date, the move to a T+1 settlement cycle is beginning to show signs of success.

That’s according to a white paper issued by the Securities Industry and Financial Markets Association, a key stakeholder and thought leader in preparing the market for the switch. SIFMA said the change has reduced risk and increased efficiency in the market.

“After more than three years of rigorous and coordinated activities to plan for – and ultimately implement – a shortened settlement cycle, the industry is recognizing reduced settlement risk across the U.S. capital markets,” SIFMA said. “Firms are now able to make better use of their capital while promoting financial stability. Ultimately, T+1 has provided the appropriate balance between increasing efficiencies and successfully mitigating risk for the industry.”

Those efficiencies can be seen in some of the initial data collected as of July 31. Since implementation at the end of May, 95% of transactions are submitted by the 9:00pm cutoff date, much higher than what was observed in a T+2 environment. 

Other signs pointing to its relative effectiveness are the Prime Broker Affirmation Rate, up to 98% from 81% in January; the Investment Manager Auto Affirmation Rate is up to 96% from 92% in January, in addition to the Custodian or Investment Manager Affirmation Rate, increasing to 88% from 51% in January. Plus, Continuous Net Settlement fail rates remain at around 2%. 

“The core metrics that the report focuses on are Affirmation rate, reduction in clearing fund contributions and fail rates which were universally seen by the industry as main measures of success for T+1,” said Steve Byron, managing director, head of technology, operations and BCP at SIFMA. “Members may choose to measure other metrics as it relates to their business/performance and the T+1 deployment over time.”

In developing the proposal over the last few years, the Municipal Securities Rulemaking Board considered instituting specific time frames to complete trades by, but purposely left the language as “end of the day on trade date” for firms to “maximize their internal processes to meet the appropriate cutoff times.”

A T+1 Industry Command Center, which ran from May 24 to May 31, was also established with the objective of proving “support, prior to, during and post implementation, share conversion status information and increase transparency into participant activity,” SIFMA said. “Ultimately, the Command Center served its purpose: participants were able to call in and be quickly connected with members from various vendors or DTCC for resolution. The Command Center was critical to the success of go-live and was a key enabler of the smooth transition.”

The report also plays with the idea of a future move to T+0, or a same day settlement cycle, which SIFMA points out as a much different step than those already taken.

“While past transitions were an evolution of industry practices, moving to T+0 would require a fundamental reinvention of a range of products and processes across the trade lifecycle and large-scale changes bring with them risks that could potentially disrupt the operations of multiple products critical to the operations of the capital markets,” SIFMA said. “Any action towards T+0 should be preceded by an extensive cost-benefit and risk analysis to validate the perceived benefits outweigh the risks and costs.”

But SIFMA is ultimately proud of the move and the efforts they, the Investment Company Institute and the Depository Trust & Clearing Corporation, both of whom aided in the transition and in writing this report.

“The success of this initiative demonstrates the value of close coordination and collaboration among the industry, with the participation of firms, market infrastructure providers, and industry associations in the U.S. and internationally,” SIFMA said. “As the industry looks to future operational transformations, whether in response to regulatory change or new operating models, we recommend that they consider the myriad of experiences which made the U.S. T+1 transition successful.”