Financial organizations know that May 28 was the date rules from the Securities and Exchange Commission (SEC) and FINRA went into effect that set the new standard for securities settlements as the next business day after a trade, or T+1. The challenge many of these organizations now face is how to reliably speed up systems and processes enough to complete these settlements a full day sooner than the previous T+2 standard. Let’s examine this challenge, and how it can be solved with a data-intensive approach to accelerating performance through process optimization and more automation.
T+1 Poses IT Challenges for Financial Firms
The recent transition from T+2 to T+1 as the new standard for securities settlements means more than just losing a day to process transactions. Financial organizations are also gaining a host of IT challenges and bottlenecks that can lead to non-compliance and threaten competitiveness in the “new normal” of T+1. Firms are looking for solutions that deliver the orchestration and automation they need to update and unify the “spider web” of functions, processes and systems they may currently have.
Complexity and scale pose dual challenges in trying to accelerate the many processes involved in securities settlement. These include verifying execution, ensuring the correct securities end up in the right account at the right price, and updating risk, margin and other systems to capture the new positions. Even with the previous T+2 threshold, the huge volume of trades done every day tended to strain IT systems and workflows and led to human error, process breakdowns and IT failures.
With the move to T+1, all of the above steps must now be done the day of the trade or the next day so that overnight batches can run at the end of T+1 to show that a trade has been settled. There is now even less margin for error-prone workflows or excessively manual processes. And since T+1 includes the time spent to resolve any failures and breaks in reaching settlement, cutting down the time to isolate and fix these problems is a crucial priority.
Modernizing Toward T+1 Compliance
Financial sector organizations are now on the hook to modernize their IT systems and processes to stay compliant given T+1 release. Solutions must accommodate multiple stakeholders and business functions since entities subject to the new rules include all capital markets banks, prime brokers, asset managers, broker dealers, hedge funds and even large insurance companies.
To satisfy the T+1 requirement, transformation teams need the right tools to automate workflows and case management functions while gaining transparency into the status of processes and any exceptions or breaks that arise. A viable platform should also contextualize data and tailor access to specific users – including heads of operations, middle and back office, client services, treasury operations and reconciliations staff.
Throughout, better orchestration is needed to align previously stand-alone systems performing stand-alone functions. Solutions must be able to conduct process mining with the appropriate business, regulatory and risk management context applied to all data and systems. This helps ensure processes are optimized and configured to scale securely and compliantly through automation.
Key Implementation Priorities
The best approaches to staying compliant with T+1 will cover all the bases mentioned above in a holistic, integrated and user accessible solution. And while every implementation will have its own contours and challenges depending on the size and the specific nature of the operation, success is closely tied to a few key capabilities and priorities that organizations should pursue.
As mentioned above, process mining is essential and the specific approach should ideally be an iterative one that allows for repeated adjustments and performance analysis. This continuous improvement approach to process mining should, in turn, be supported by an agile data management architecture. The gold standard for this is a data fabric that creates an abstraction layer to connect all data where it resides and eliminates the need to physically migrate, reformat and configure data across multiple systems.
Proper T+1 compliance relies on an effective approach to automating previously manual processes for everything from exception management and connected servicing, to trade enrichment and credit breach case management functions. Teams must also recognize that their company may not have been able to update all legacy systems in time for T+1 enforcement. Fortunately, legacy-interoperable low-code options are helpful to automate previously manual or error-prone processes while existing infrastructure remains in place.
These combined capabilities can dramatically accelerate every step in the securities settlement process. Consider the use case of exceptions, or breaks, from reconciliation. Typical reconciliations from which breaks can result include front office vs. back office, house settlement vs. street, and multiple leg trades vs. settlements reconciliations. For these and all other processes in the securities settlement lifecycle, applying AI-powered process automation and process mining supported by an underlying data fabric allows firms to accelerate operations to comply.
Conclusion
With the May 2024 arrival of the T+1 requirement, firms working to comply with this newly compressed timeline must leverage more strategic processes and technology in order to improve efficiency and reduce both risks and costs to the organization. A comprehensive approach to modernizing data, optimizing processes and scaling through automation is required to achieve the goals of high settlement rates for securities in a T+1 environment.
