Winston Churchill’s infamous words “now this is not the end, it is not even the beginning of the end, but it is, perhaps, the end of the beginning,” immediately spring to mind when it comes to the May 24 deadline for T+1. The long-awaited confirmed go live date is very much the start of a long operational journey, and market participants need to come to terms with the fact that full compliance by this date is not necessarily going to happen.
This is why, for brokers, custodian banks and asset managers, finding ways to address the following bottlenecks now should, in theory, make the road to T+1 a much smoother one:
Improving on pre-matching
The process of comparing settlement details to ensure that they meet the terms of the transaction, pre-matching is a key early-stage component of T+1 prep. Changes to trade matching processes, including much tighter deadlines for the receipt of an asset managers trade instructions, not to mention the resolution of pre-trade problems, should be considered now.
Addressing settlement fails post trade matching
If the industry harbours any hope of reducing settlement fails post the matching process, then the brokers, custodian banks and asset managers can’t afford to be disconnected from one another. Much of the real work that needs to be done falls on the sell side, which includes the banks, brokers, and dealers. Although the buy side drives the process by initiating trades and their corresponding instructions, there is often a lack of connectivity between the buy side, sell side and custodians. Bringing counterparties together that are not necessarily in a direct chain of communication is not an easy problem to solve – but it can be done. For example, brokers and asset managers already talk, but then the conversation with one of the most pivotal counterparties in the entire settlement chain, the custodian bank, has been somewhat of an afterthought.
This is largely due to the fact that brokers do not typically use custodians in the US market as they are direct participants of the DTCC. However, the custodian banks are incredibly important from an asset managers perspective. The issue is they do not know who the custodian bank is for every fund that they are trading with, which means they are unable to reach out directly to the custodian bank because they have no contractual relationships with them. Ultimately, this is why there needs to be more seamless real-time dispute/problem resolution occurring between the three counterparties.
As the road to T+1 begins in earnest, failure to address these bottlenecks and obstacles in a coordinated fashion will leave market participants with highly inefficient settlements. These issues must be dealt with before operations staff in the back office even begin thinking about how to communicate effectively with the risk team in the middle office around other T+1 related problems that will emerge between now and May 2024.
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