Adapting to T+1: Risk Management For Broker-Dealers

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With the SEC moving to T+1 settlements by May 28, 2024, it's clear that managing risks is more crucial than ever for broker-dealers.?

A study from Bloomberg Intelligence (BI) has estimated that the upcoming US transition to T+1 could cost the industry $31 billion a year - with nearly one-third of institutional trades set to fail.

This change isn't just about keeping up; it's about staying ahead and safe in the game.

But first, here is a quick roundup of big news that made headlines in the FinTech industry.?

News Roundup!

1. DTCC Issues Guide to Prepare Clients for T+1 Conversion Weekend
2. T+1 is the Biggest Regulatory Headache for 2024
3. Automation can improve equity performance by over a third, finds Bloomberg
4. DTCC’s FICC Treasury Clearing Volumes Grow 31%, Now Represent USD $7 Trillion in Daily Average Activity
5. World’s first major act to regulate AI passed by European lawmakers

Webinar Alert!

T+1 Settlement: Boosting Market Safety

Broker-dealers play a critical role in managing risks to protect client assets and comply with regulations. Recent challenges, including the COVID-19 pandemic and meme stock volatility, have exposed vulnerabilities in liquidity and counterparty risks.

The SEC's shift to a T+1 settlement cycle is designed to fortify market integrity by reducing the time for potential defaults, thereby mitigating market and liquidity risks. This expedited settlement process also improves funding efficiency, enabling quicker access to funds, minimizing the likelihood of failed trades and fraud, and lessening liquidity risks for broker-dealers and other market participants.

Impact of T+1 Settlement on Broker-Dealers

Shifting to a T+1 settlement cycle compels broker-dealers to overhaul their trade processing and risk management strategies. The reduced settlement window demands stringent regulatory compliance and accurate record-keeping. This is particularly challenging for transactions across different time zones, where the timeframe to resolve discrepancies is now shorter.

Broker-dealers must therefore upgrade their technological infrastructure to ensure transaction accuracy and mitigate the risk of settlement failures, adapting to the T+1 environment's demands.

Real-Time Trade Processing for Risk Mitigation

Global trading's pace demands swift action, particularly for transactions across various time zones. Traditional manual and outdated systems pose operational risks, lacking efficiency and real-time insights.

Shifting to automated, real-time trade processing is vital. It enables broker-dealers to allocate, reconcile, and confirm trades instantly, lowering operational risks. This approach also ensures accurate, immediate trade information, enhancing cross-border collaboration.

Looking Ahead: The Future for Broker-Dealers

• Technology Investment: Necessity for advanced technology to navigate through T+1 settlement changes, focusing on agility and regulatory adaptability.
• Operation Streamlining: Emphasis on automating core operations to minimize manual tasks and enhance post-trade execution.
• Automation Benefits: High automation levels in trade processes such as matching, confirmation, and FX operations to improve efficiency.
• Informed Decisions: Utilization of automated dashboards and reports for accurate risk assessment and timely decision-making.
• Enhanced Focus: Shift towards prioritizing faster trade execution and reducing post-trade risks by overcoming technological and process limitations.

That’s a wrap on this edition.

We'd love to hear your thoughts on it. Also, If you want to explore your company's specific scenario in transitioning to T+1, please let us know! [email protected]