The Countdown to T+1 Settlement Cycle Transformation

Navigating the Final Stretch

By Jeff Gearhart


The transition of the U.S. financial markets to a T+1 settlement cycle is entering the home stretch with an implementation date of May 28, 2024. This is not just a regulatory shift but a race against time for firms to revamp their operational and technological infrastructures.

T+1 Settlement Cycle Implications for Industry Firms

The adoption of technology to improve operational efficiencies and eliminate manual procedures is essential. Market participants that have not prepared adequately will be exposed and incur additional operating expenses.  There is also the strong potential for increased regulatory scrutiny.

Shortening the settlement cycle adds complexity to securities lending, especially regarding loan recall times and the liquidity of the loaned security.  The buy side must adapt to a quicker allocation schedule, coordinate with custody banks, and manage foreign exchange transactions that are on a different settlement cycle.

Unlike prior transitions to a shorter settlement cycle, the move to T+1 requires many trade settlement functions to be performed on trade date and complicates others. Trade allocations must be provided sooner to enable the affirmation/confirmation process to meet the 9 p.m. deadline. The reduced trade cycle adds complexity to securities lending, especially regarding loan recall times and the liquidity of the loaned security. T+1 also presents more challenges to the buy side as they must adapt to the quicker allocation schedule, coordinate with custody banks, and manage foreign exchange transactions that are on a different settlement cycle.

Since the industry’s recommendation to shorten the settlement cycle was submitted to the Securities and Exchange Commission (SEC) in August 2021, significant resources have been committed by industry participants to plan and prepare. Organizations like the Depository Trust and Clearing Corporation (DTCC) and SIFMA have laid the groundwork with detailed playbooks and testing protocols. Both buy-side and sell-side firms should be fully vested in implementing and testing their preparedness plans.

Considerations for T+1 Preparation

At this point in the race, firms should be well aware of the implications to their business and are implementing, testing, and refining new technology and operational processes. A few key points to keep in mind:

Key technology and clearing providers.  Firms must continue to actively engage with these parties to understand their role in the process and to ensure their readiness for the transition.  Firms cannot delegate responsibility to external parties and must remain diligent in their oversight and communication.  This includes understanding the changes that are being made, any new features or updates, results of testing and remediation efforts, and the roadmap to May 28th.  It is also a good time to review contracts and service level agreements.

Engage with counterparties and clients. The shortened settlement cycle affects all parties to the transaction, including the buy side. It is important to understand counterparts and client preparedness for the transition, and act pre-emptively to address potential issues.  Firms should have metrics to identify and track settlement issues and highlight those trading desks, counterparts, and clients that may have potential problems after the transition. 

Internal preparedness. It is important to educate your team and make sure all parties are aware of the new requirements and are trained in new technologies and operating procedures. This transition should not be viewed solely as a technology or compliance initiative. It requires collaboration with sales, trading, operations, risk management, and treasury functions. After the implementation of T+1, it will be important to closely monitor the impacts and make any necessary adjustments to processes and strategies.

Policies and Procedures. Although often neglected, these documents are important in defining a firm’s supervisory structure and clearly assign accountability.  Updating these documents serves as a good exercise to clarify roles and responsibilities, can be valuable in identifying operational gaps, and provides a valuable working document for guidance addressing issues and concerns.

Business Continuity and Disaster Recovery Plans. The shorter settlement cycle will stress a firm’s ability to function effectively during business disruption from unforeseen circumstances. Firms should assess their own contingency plans in light of the faster processing requirements as well as confirm that key technology providers have prepared accordingly.

Oyster Consulting is the partner you need to prepare for T+1.  Our consultants are experts in all aspects of front-, middle-, and back-office procedures and can help determine the impact on your firm. We are actively engaged with key service providers in the industry, including the Fintech community, technology platforms and clearing brokers. Our experts provide can review your clearing and operating contracts, assist with your operational and technology roadmap, amend policies and procedures, and create or update your business continuity and disaster recovery plans. Leverage our industry perspective to minimize disruption during T+1 implementation.

About The Author
Photo of Jeff Gearhart

Jeffrey Gearhart

Jeffrey Gearhart is an intuitive, analytical leader with over 30 years of experience in banking and capital markets businesses. Prior to joining Oyster, he held senior leadership roles with The Bank of New York Mellon, including business line COO, CFO, business development and relationship management.