Andrew Zelenka, Principal Consultant, TCS Financial Solutions
What is “T+2”?
In financial markets, T+2 is the acronym for the proposed three-day duration cycle between the day the order is executed (the trade date) and the day payment and the securities typically change hands (the settlement date). This change will reduce one day from the current process. Shortening the settlement cycle affects any entity (retail clients, investment managers, hedge funds, custodians, broker dealers and markets/depositories) that facilitates trading, including settling equities, corporates, municipal bonds and unit investment trusts (UITs) in the U.S. market.
When will T+2 implementation occur?
The tentative timeframe developed by the Industry Steering Comittee (ISC) and the Industry Working Group (IWG) to implement T+2 is Q3 2017. The deadline is contingent on meeting certain milestones,
and a delay at any point may push back the overall implementation for the U.S. The major milestones include:*
What needs to change to achieve T+2 settlement?
Shortening the settlement cycle is likely lead to some changes in market practices – e.g. pre-settlement matching, confirmation and affirmation of client orders as early as possible and, ideally, on trade date, improving matching and settlement efficiency, accelerated clearance of retail funds, managing the potential for increased settlement failure, dealing with late settlements and sequencing deliveries to maximize settlement efficiency. A recent study by Omgeo indicates there is a direct correlation between high same-day affirmation rates and high settlement rates, implying that the processes that come under the microscope are allocation, confirmation, matching and affirmation.
Compressing the time it takes to complete these processes will help; although, without ensuring that systems contain
proper settlement instructions, they may complete a process that inadvertently induces settlement fails or the need to
make settlement into suspense accounts and subsequent post settlement internal transfers. Automating systems to receive, store and enhance deliveries with settlement instructions will help avoid the time-consuming reconciliation process that is ill-afforded in a T+2 world.
Solution providers and in-house proprietary systems should review their processes against these practices and requirements, ensuring that the technology supports the business and market practices. These systems should be based on messages rather than rely on receipt of files, which inherently induces artificial delays. Similarly, systems should rely on events rather than trigger processes by time, wherever possible. Technology platforms need to optimize processing, ensuring database, application and web server processing is streamlined to process the volume required in compressed timeframes. The technology should support and implement high availability processing, with real time data backup and disaster recovery mechanisms that either support redundant processing with no single point of failure or the ability to quickly switch to backup systems with no loss of transactional data.
Read the white paper.