Initial Reflections
T+7 Days
Content but not complacent
June 4, 2024 - After months of analysis, deliberations, hard work and more than a little trepidation as deadline day loomed, U.S. T+1 is fully up and running. The main takeaway from week one is that apart from an initial night delivery issue at the DTCC last Tuesday and some teething issues at the Canadian Securities Depository on a subset of securities, the first week of accelerated settlement for U.S. securities has gone well overall. Most intraday processing delays were subsequently resolved with minimal market impacts.
Reported trade failure rates industry wide did not spike (which was a primary concern pre-implementation) with the percentage remaining under 2% (1.90% to be exact) on the first day of the newly accelerated cycle.
DTCC’s reported data also indicates that same day affirmation rates, have also been a success, staying well above the prescribed 90% threshold. In fact, according to DTCC, CTM Allocations Rate by 7 p.m. ET rose above 99%. This is a strong indicator of the increased operational efficiency and automation spurred by T+1.
Concerns around the double settlement day on May 28 and the MSCI index rebalancing driving trade volumes up significantly on Friday, May 31 were also avoided in terms of settlement and associated FX liquidity requirements on the day.
While global industry can be relatively self-satisfied with the initial implementation and limited disruption, there is no time for complacency. The full impacts of the change will only truly be observable after a large sample size of trading can be reviewed. USD FX liquidity and ongoing securities lending discussions around new recall and loan termination cutoffs will continue. The full impacts of European UCITS and ETF securities and investor liquidity mismatches have yet to fully play out.
A good start is half the battle but there will be no time to rest on laurels. And that is before we even start to consider that industry is already working towards acceleration of settlement cycles for other large trading blocs such as the European Union, United Kingdom, and Switzerland.
For now, however, we can collectively take a moment to bask in the positive afterglow of a successful implementation, but we are merely at the end of the beginning for U.S. T+1 – a lot more to come through this year.
This blog will continue to provide insights from our client interactions and industry dialogue and BBH, as always, is prepared and ready to assist clients with their U.S. T+1 needs for the foreseeable future.
IS-09970-2024-06-03
U.S. T+1: A Final Checklist
T-11 days
May 17, 2024 - Five things to double check before the May 28 deadline.
1. Don’t Forget about Argentina, Canada, and Mexico.
These markets will change over to T+1 a day earlier than the U.S. on Monday, May 27, so be prepared if you trade in them. Keep your ears open and your eyes peeled for definitive deadlines and cut offs from Mexico and Argentina as they still have not finalized their T+1 rules.
2. Prepare for Some Key Index Rebalancing Events.
The U.S. will make the transition to T+1 on May 28. The date was specifically chosen to give industry a public holiday weekend to prepare for the T+1 changeover. However, in choosing the date the SEC has created an unintended consequence and pressure point just days after implementation.
Immediately in advance of implementation, traders will also need to consider the Russell Indices Annual Reconstitution. In addition, the semi-annual rebalancing of the FTSE All World index will be made after the U.S. market closes on May 24, which is also the last day that the U.S. will trade on T+2. When the U.S. markets reopen on May 28, settlement staff will still be dealing with the last trades from Friday on the old U.S. T+2 schedule and having to deal with any issues arising from Canada, Argentina, and Mexico moves. However, at the same time they will be hit by a tidal wave of new T+1 orders due to the index announcements.
Just three days later, MSCI will undertake its May rebalance. Each MSCI index is rebalanced every quarter on the last trading day of the month. In this process, MSCI analysts add or remove stocks from the index to ensure it is still an effective benchmark for the market it represents. The fact that the latest shake-up falls on a Friday could further complicate matters. This will trigger one of the busiest trading days on U.S. markets of the year, as fund managers who track MSCI’s indices all trade at 4 p.m. to avoid tracking error.
3. Holiday Schedule
Some people directly involved in U.S. T+1 may need to cancel their Memorial Day weekend activities given the task ahead. Staff planning and operational coverage is a key consideration. More generally, in the FX holiday conflict blog below, we have highlighted that global holiday conflicts are a key consideration in the new world where the U.S. might be misaligned with other important global markets. Managers must plan accordingly and understand the impact across workflows and providers.
4. Last Minute Affirmation Temperature Check
While the DTCC have reported that industry affirmation rates are improving, as we have stressed throughout the planning process, your operating model is only as strong as its weakest link. It might pay to check in with all your broker-dealers, custodians, and intermediaries to ensure readiness for the new affirmation processes and deadlines. Questions to ask include:
- Have all necessary Trade Suite IDs been acquired and confirmed?
- Are all counterparty SSIs up to date?
Now is the time to sweat the small stuff on your T+1 planning.
Whether you have confirm matching, direct affirmations, or a multi-affirmation model in place you will need to ensure timestamping and reporting are ready to go for live date.
5. Know Help is at Hand
BBH, as always, is prepared and ready to assist clients before, during and after the deadline. In addition, consider industry resources such as the SIFMA Command Center open line at various points around the conversion dates.
IS-09918-2024-05-15
FX Holiday Conflict
T-46 days
- Nicole Walsh
April 12, 2024 - As managers adapt their FX workflows to accommodate the T+1 settlement change, there’s one area that is unavoidable and impacts everyone: global holidays.
The holiday conflict occurs when it’s a valid security settlement date for USD, CAD, or MXN but a holiday in the base currency of the fund. This prevents the FX from settling T+1 along with the security trade. During a holiday conflict in today’s T+ 2 world, if an investor is buying USD, CAD, or MXN securities, the FX value date would be brought in one day, to T+1, so the funds are available to settle the security transaction the following day.
However in a future T+1 cycle, when the holiday conflict arises, for security buys the FX becomes a same day trade. Most likely, by the time the security trade is matched and the FX demand is known, it will be past the same day deadline.
To manage the FX holiday conflict, managers have the following options:
- Pre-fund
- Do not trade USD, CAD, or MXN securities when this conflict would arise
- Keep cash balances on hand
- Take no action and accept overdraft fees from the custodian, the security trade would settle though
- Negotiate T+2 settlement with the security broker to allow the security trade, and FX to settle T+2
No matter which option is chosen, T+1 has brought the holiday conflict to the forefront and managers must plan accordingly and understand the impact across workflows and providers.
IS-09833-2024-04-12
Navigating the Global Impact on ETFs
T-54 days
April 4, 2024 - Our Talking T+1 webinar series recently highlighted the impacts of T+1 on the ETF market and how participants can prepare for the shortened settlement cycle. Panelists agreed there’s still work ahead and shared a few areas of focus for firms’ T+1 planning, which include:
- One of the most significant challenges is the potential misalignment in settlement between the ETF shares and the underlying basket, as part of primary market order activity. Issuers must adjust, as the underlying basket may remain on a T+2 cycle (for U.S. ETFs investing globally) or shift to a T+1 cycle (for global ETFs investing in the U.S.).
- Misalignment will also impact UCITS ETFs in relations to requirements around cash held within the fund – both how much cash can be held with one entity (restricted to 20%) and by how much the fund can be overdrawn by (restricted to 10%). Each of these scenarios may have different repercussions depending upon whether they are deemed to be inadvertent or advertent breaches, and ultimately different resolutions.
- Time zone mismatches and liquidity issues are also a primary concern. Just one example includes the need for ETF issuers lending their portfolios to focus on security lending processes and automating workflows to enable securities back on recalls.
As the transition continues, managers must keep ETFs on the forefront due to their multi-asset, multi-jurisdictional nature. T+1 has sparked conversations and cross-collaboration among ETF industry participants, leading to workflows being reviewed and increasing automation. The resulting solutions could benefit the entire industry.
IS-09822-2024-04-04
UCITS Impacts
T-124 days
January 25, 2024 - While the U.S. moves to T+1 in May, Europe will remain on a T+2 cycle and E.U. asset managers are expecting several challenges ahead. Nowhere will this liquidity mismatch be more impactful than in the UCITS space as the misalignment creates problems to adhering to the framework’s investment restrictions, particularly with:
1. Cash on Deposit: The rules state that a UCITS fund may hold a maximum of 20% of its net asset value in cash with any one eligible credit institution at any given time. With U.S. securities sold to fund the redemption requests now settling on T+1, the possibility of cash breaching the 20% limit in the case of large redemptions becomes far greater.
Strong focus should be on processes to avoid recurring cash deposit breaches, as repeated instances could draw the focus of boards and ultimately regulators; thus, making efficient management of this misalignment imperative.
2. Borrowing Limits: A UCITS may borrow only on a temporary basis and if it represents less than 10% of its net asset value. Settlement cycle misalignment means U.S. securities might need to be purchased in advance of investor money being received which could overdraw the UCITS cash account and breach its borrowing limits.
The UCITS fund will generally receive the investor’s funds on a T+3 or T+2 cycle. Under T+1, fund managers looking to buy U.S. securities upon receipt of the subscription order will now settle in the market before receipt of the investors’ cash.
This increases the likelihood of the UCITS fund being overdrawn as the need for bridge funding to purchase U.S. securities is required in the case of net subscriptions. Breaches may occur if the funding mismatch creates a borrowing amount greater than 10% of NAV, requiring regulatory reporting, and investor compensation owing to the liquidity mismatch. As high interest rates persist, overdrafts may weigh upon the fund’s performance.
Next Steps
With cycle misalignments, UCITS managers should revisit their liquidity and cash management protocols to assess whether a change of investor cycles is needed by May.
IS-09594-2024-01-24
Talking T+1: Debating the Overlooked Challenges
T-126 days
January 23, 2024 - Our Talking T+1 webinar series has kicked off with our first session exploring how industry and client conversations have progressed from educational towards a practical application of models.
The panel, moderated by BBH’s Adrian Whelan, Global Head of Market Intelligence, and featuring the firm’s Global Custody Product Manager Katelyn O’Grady, Relationship Manager Laura Murray, and the DTCC’s Executive Director of Institutional Trade Processing Bob Stewart, debated the overlooked challenges and discussed the key considerations of the move as the May implementation draws near.
Our panelists discussed the combination of solutions managers are deploying across their operating model including increased automation, trade execution timings, cash buffers, and aligning securities settlements with the investors’ cycle. Despite the nuances and complexities of the transition, our experts shared the following takeaways:
- If you’re looking at changing an affirmation model or implementing one - don’t wait. A custodian can help get you set up accurately. An efficient affirmation model can avoid failed trades, increased trading costs, as well as avoid any regulatory reporting issues.
- Liquidity mismatches will now naturally occur for many portfolios and require detailed end-to-end reviews. UCITS funds have specific regulatory considerations regarding excess cash balances and overdrafts on funds, these should be considered immediately. Start looking proactively at solutions as they can be timely to implement.
- Everyone needs to look at their counterparties throughout the chain and get them engaged.
Missed the first session? Watch the full recording here.
Stay tuned for our next webinar in the series, where we will share insights on the downstream impact of T+1 on ETFs.
IS-09586-2024-01-23
Asia Impacts
T- 161 days
- Ted Suda - Yoshifumi Nakajima - Chris Pigott
December 19, 2023 - The upcoming U.S. T+1 settlement cycle will have a significant impact across Asia due to time zone differences. Many regional asset managers and banks who lack U.S. time zone coverage will need to evaluate changes to their workflows.
Let’s take a look at the expected impacts:
- Shortened Cut Off Times: Under the current T+2 cycle, asset managers and banks in Asia already face delays due to time zone differences. With a T+1 transaction, they lose a day and must operate on an even tighter schedule requiring them to be prepared on trade date or early morning of T+1 (local time). This provides less flexibility to manage and address any discrepancies during settlement
- Trade Affirmation Process: Given the shortened cut off times, many firms are assessing if they need to follow a trade affirmation process to reduce the risk of fails. By affirming their trades, instructions will need to be prepared on T date or the very early morning of T+1 with an expectation of straight through processing (“STP”)
- Foreign Exchange Transactions: U.S. T+1 will reduce the trading window for FX transactions and more same-day value activities are expected on T+1 Asia morning. For Japan, managers performing the FX settlement transactions must either take settlement risk through same day value FX transaction or consider prefunding their transaction
For more insights on the expected impacts of T+1 in the Asia region, read here.
IS-09526-2023-12-12
The U.S. Won’t be the First to T+1 - Why it Matters
T-166 days
December 14, 2023 - With the focus on the U.S. T+1 transition, it can be easy to forget that Canada and Mexico will also be accelerating their settlement cycles come May 2024. However, as close neighbors, they should be included in your project planning. We should also acknowledge that other major markets like India have already successfully converted to a T+1 settlement cycle in January 2023.
While the U.S. will be going live on Tuesday, May 28th (following Memorial Day), Canada and Mexico will make the switch a day earlier. These two countries are often forgotten in conversation, yet roughly 50% of trading volume at the Mexican depositary (Indeval) are foreign securities, predominantly U.S. Equities and ETFs, and many Mexican and Canadian securities dual list (locally and then in the U.S.).
Therefore, Canada and Mexico decided on the following flight paths to T+1:
- The last date securities will be traded on the current two-day standard in Canada, Mexico, and the U.S. will be Friday, May 24th, 2024.
- The first day of T+1 trading will be the next business day in all countries: Monday, May 27th, for Canada and Mexico and Tuesday, May 28th, for the U.S.- making Tuesday, May 28th a double settlement day for both the Canadian and Mexican markets.
Going a day earlier allows the required systems changes to occur over the weekend rather than overnight after market close. Trading volumes for both Mexico and Canada historically are also much lower when the U.S. is closed.
While final guidelines and the opening of industry testing for Mexico are still being established, Canada has made a few adjustments. The final Canadian T+1 rules and guidelines (NI24-101) remain outstanding, however, there appears to be helpful consensus between industry and the regulators regarding the trade matching deadline likely moving to a new 3:59 a.m. ET deadline. It’s also unlikely additional changes will be made to SWIFT MT54X messaging, the trade affirmation process, or cash deadlines because of the Canadian change.
IS-09532-2023-12-13
T+1 and the Global ETF Ecosystem
T-196 days
- Antonette Kleiser - Chris Pigott
November 14, 2023 - The U.S. T+1 transition will have global impacts for ETFs, with potential for settlement mismatches due to timing discrepancies at the basket security level, as well as between primary and secondary market trading.
Let’s take a closer look at how global ETF settlements will be affected:
- U.S. ETF Settlements: Creation and redemptions will become more complex for U.S. ETFs with global holdings, which settle outside the U.S. settlement infrastructure. For secondary markets, trading will require creation activity to support shortened settlement, ETF sponsors and APs will need to support a T+0 creation process.
- European ETF Settlements: Most European exchanges settle on a T+2 cycle. Primary market ETF order activity may need to consider a move to T+1 settlement if most of the securities held in the portfolio are from the U.S. or Canada to avoid overdrafts. This has the potential to create mismatches in ETF settlements.
- Asian ETF Settlements: Asia-based managers will need a coverage model which accounts for U.S. business hours, where they can monitor and amend their trade instructions during the Asia evening of T+1, if the trades are not matched with their counterparties. The use of pre-funding will likely expand, as ETF baskets with U.S. or Canadian securities will now come into scope.
Read here for full insights around T+1’s impact on global ETFs.
IS-09451-2023-11-10
5 Myths and Assumptions
T-218 days
October 23, 2023 - There’s nothing like a large-scale mandatory market shift with a tight deadline to get our industry talking. As impact assessments evolve and project plans are tweaked to be ready for a shorter securities settlement cycle come May 2024, here are the common assumptions and misunderstandings about T+1:
1. No Big Deal – U.S. Trading is All Automated and Processed Straight Through Already
Although rare, fails do occur even with our sophisticated trading infrastructure today. Focusing solely on the post-trade settlement of the U.S. T+1 compressed timeline overlooks impacts across end-to-end lifecycle management.
2. SEC Didn’t Include Penalties, so I’ll Just Settle Late – There’s Minimal Downside to Settling Late Anyways
This is simply not true. Fails can create downstream liquidity issues, reputational and financial risks, as well as potential regulatory intervention.
3. I Can Already Trade T+1 Today Without Any Issue
With the compressed T+1 deadlines reducing late instruction opportunity for non-U.S. traders, this may no longer be possible.
4. My Bank or Custodian Will Fill in My Liquidity Gaps and Contractual Settlement Risk
Participants must ensure they are aligning their investor and securities cycles or addressing these gaps with providers.
5. I've Got Time – Implementation Will Be Delayed, It Always Is
Industry lobbied hard for a September 2024 implementation, which was rejected. It would be folly to plan for any date other than May 28.
To debunk these misleading assumptions, read the latest T+1 article.
IS-09352-2023-10-19
Europe Joins the T+1 Settlement Party
T-235 days
October 6, 2023 - Following the SEC’s decision to shift the U.S. to a T+1 settlement cycle, many eyes turned to Europe and whether they would be fast followers. Global banks and asset managers are currently discovering how the decoupling of cycles of two of the largest trading markets and liquidity pools brings a range of additional operational complexities.
So it’s no surprise to see that the European Securities and Market Authority (ESMA) has now launched its own T+1 call for evidence seeking industry’s opinions and “quantitative evidence” of the costs and benefits of such a switch. The United Kingdom has already mobilized an industry “taskforce” to assess acceleration of its own settlement cycle, so the global direction of travel remains consistent.
A large caveat regarding Europe (discussed in detail here before) is that although the U.S. and U.K. markets are large, they are also relatively homogeneous compared to Europe’s fragmented and complex trading ecosystem. Synchronization of diverse currencies, centralized securities depositaries, central clearers, and stock exchanges makes the European project far more complex than the U.S. version (and that’s proving to be complex). Therefore, a clear-eyed view on the benefits, risks, costs, and sensible implementation schedule will likely be raised within industry responses.
Industry submissions are due by December 15, with ESMA committing to publishing its final report in Q4 2024, at the latest. While impending changes in U.S. & Canada remain the primary focus, monitoring all T+1 activity globally remains imperative.
IS-09308-2023-10-05
U.S. T+1: Which Bucket Are You In?
T-236 days
October 5, 2023 - Recent industry engagement on T+1 has received a spectrum of client opinion on its expected impact – ranging from indifference to high priority.
Generally, global asset managers and banks fall into one of three T+1 appreciation buckets:
- Bucket 1: All Good
Knowledgeable and engaged, with detailed planning underway and considering impacts beyond specific trade settlement aspects - Bucket 2: Pretty sure we’re okay
Broad awareness with projects underway on specific operational and timeline elements but lacking clarity on end-to-end impacts and interdependencies - Bucket 3: Meh
Apathetic or even unaware of the impacts, primarily seeing the change as the broker’s, custodian’s, or bank partner’s deliverable
While the impact assessment will depend on the specifics of your business model, detailed analysis with clients has shown we expect previously unforeseen operational and regulatory impacts to jump into focus.
There is a real divide – some firms are seen as T+1 alarmists while others seemingly haven’t considered the wide reaching impacts of T+1. However, it’s much more than a trade settlement shift. It’s a re-evaluation of the entire workflow.
So, the question remains, which bucket are you in?
IS-09301-2023-10-03
T+1: Hot Topics
T-253 days
September 18, 2023 - With little over 250 days now left to prepare, we share the regulatory state of play in four key areas.
Testing Times - Industry testing1 has begun, slowly but steadily. DTCC created the ability to test “end to end” in T+1 and T+2 environments concurrently.
A Global Trend? - Will the rest of the world ‘fast follow’ the U.S. and Canada’s lead on T+1? The United Kingdom and European Union are already analyzing the possibility.
Affirmations - Affirmations are proving a robust area of debate across the market given an SEC regulatory mandate for date and time stamping. With optionality in configuration of trade affirmation models, there is no best way to conduct DTCC affirmations. (We take a closer look in the following blog post).
Fund Focus - In European UCITS, there is a sharp focus on alignment of securities and investor trading settlement cycles to ensure funds don’t end up with too much or too little cash due to a mismatch in the securities and subscription/redemption cycles.
IS-09253-2023-09-15
Affirmations in a T+1 World
T-253 days
- Derek Coyle - Katelyn O'Grady
September 18, 2023 - Mandatory same-day affirmations inclusive of new procedural and recordkeeping requirements (including date and time stamping of allocations and affirmations) are some of the most challenging parts of the SEC rules to ensure readiness for U.S. T+1 settlement. Different options exist in how affirmations can be processed:
Custodian-supported confirm matching
- The investment advisor provides trade instructions to their Global Custodian who then matches them against the related broker confirmations in DTCC’s Institutional Trade Processing (ITP) system to complete the affirmation.
Direct Affirmations
- The investment advisor independently reviews the broker confirm in DTCC’s ITP system to ensure alignment with their own trade details and subsequently completes the affirmation, which is then provided to the custodian as the trade instruction.
- In addition to the above, the investment advisor may send the trade instruction to their Global Custodian directly. The Global Custodian is then responsible for matching the affirmation from DTCC’s ITP platform to the client trade instruction to prevent duplication of the trade.
It’s crucial that investment advisors choose an optimal operational model which meets their needs to ensure alignment with regulatory compliance, operational capability, time-zone coverage, and other risks in mind.
IS-09253-2023-09-15
Synchronicity: T+1’s Greatest Challenge
T-253 days
September 18, 2023 - While asset managers and banks have rightfully focused on their own readiness, firms should not lose sight of the impact to their underlying clients and must target settlement alignment across a global network of entities and stakeholders.
Alignment of mutual fund investor and securities settlement cycles has fast risen in focus as U.S. T+1 impact analyses continue. Nowhere is this dynamic starker than in Europe where many UCITS funds have successfully attracted Asian investors, many of which hold U.S. securities.
Synchronizing NAV calculations, investor contract notes, and security settlement cycles remain paramount to raising or protecting UCITS investment from Asia. Cycle misalignment might result in denting UCITS distribution to Asian investors, as well as trade funding issues, overdrafts, trade failure penalties, tracking error and foreign exchange problems.
UCITS funds with European managers and Asian investors raise interesting asset servicing complexity that can only be fully addressed through global service models and efficient technology platforms.
IS-09253-2023-09-15
1 https://www.dtcc.com/ust1/-/media/Files/PDFs/T2/UST1-Detailed-Test-Document.
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