By Liqueo Senior Consultant, John O'Connor
On May 28th, 2024, the new T+1 settlement cycle adopted by the SEC in February 2023 will go into effect. The new rule is intended to benefit investors by a reduction in risk associated with the entire settlement process. The expectation is that the shortened settlement cycle will reduce overall risk in the following key areas:
Operational Risk – defined as losses associated with failing or flawed (especially manual) processes, systems, and people that could disrupt business operations.
Systemic Risk – defined as a breakdown of the financial system and its linkages, resulting in cascading failure and loss.
Obviously, no risk can be eliminated completely, but T+1 will aim to reduce this risk significantly.
In addition to the broader operational and systemic risk mitigation, T+1 will mitigate counterparty-to-counterparty risk in trading, reduce margin and collateral requirements and provide quicker access to funds for investors.
This is all great news for investors, but to support the move to T+1, institutions need to look quickly and carefully at existing processes to ensure T+1 can be supported. For the most part, this responsibility falls to the back office and technology groups.
While greater automation and controls in back-office operations have advanced dramatically in the past couple of decades, there are still many examples within institutions where processes exist that could hamper the implementation of T+1. These include manual processes, flawed and/or inefficient systems, or overreliance on people to perform tasks that can be automated. With the settlement cycle cut in half, these areas will have the spotlight on them as significant weak points that will need to be addressed.
Independent surveys have estimated that up to 75% of firms have completed at least a high-level assessment as to the impact of T+1. An assessment, however, is obviously not the only step needed to support T+1 rollout and the burden lies firmly on the institution to implement the change.
The below timeline gives a general overview of tasks and milestones in a T+1 implementation (subject to change/based on current SEC timeline).
Liqueo’s full range of practice areas can assist throughout the T+1 initiative.
The Liqueo Advisory practice can assist with all aspects of strategic decision making and planning in the initial stages of the T+1 rollout.
Developing, Testing, Migration
The Liqueo Front Office, Risk, Integration and Change Management, Compliance and Regulatory, and Investment Operation practices specialise in the analysis, risk assessment, and implementation phases of a T+1 rollout.
T+1 will be a significant and challenging undertaking for most firms. Ensuring the correct expertise and resourcing to support it is the key factor to success.
Through our specialised practice areas, Liqueo has the expertise to provide analysis, design solutions and implement the changes required to support the new T+1 cycle.
John O’Connor April 2023
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