Thoughts on T+1 Settlement Cycle

So, it’s been a week!?The implementation of T+1 settlement on Wall Street will?significantly?improve efficiency and reduce risks in financial transactions. Investors can look forward to faster access to their funds and increased flexibility in managing their portfolios.?

To prepare for the switch to T+1, Coherence worked months in advance implementing Depository Trust Corp’s CTM[ES1]? and Alert systems which we integrated with our portfolio management system, Bloomberg AIM[ES2]?’s. This was completed and tested weeks before T+1 launch.

The key impacts to our business specifically and to the industry broadly are:

1. Increased operational efficiency: Overall, T+1 will lead to a more secure and efficient trading environment for market participants in part because the risk of trade fails is reduced compared to longer settlement cycles like T+2 or T+3. In this regard, the improvement is due to the operational efficiencies in straight through processing that T+1 requires.

With a shorter settlement cycle, middle office operations in fixed income hedge funds can streamline processes, reduce manual intervention, and enhance overall efficiency in trade processing.

2. Reduced settlement risk: Moving to T+1 reduces the exposure to potential settlement failures and associated risks, as well as enhances the operational resilience and scalability of a hedge fund's middle office. The reduction in settlement time will also lower counterparty risk and improve overall market liquidity. It should be noted that T+1 now covers most liquid products in the US, but does not include illiquid products such as loans, CLOs, CDOs, and other illiquid and non-securities.

3. Improved liquidity management: A shorter settlement cycle allows for quicker access to funds and securities, enabling better liquidity management strategies for the hedge fund.

4. Enhanced regulatory compliance: The transition to T+1 settlement may require middle office teams to update systems, processes, and procedures to comply with regulatory requirements and ensure smooth operations.

With the first week of T+1 now past, we are happy to report that we have had a?smooth straight through process experience and feel our preparation for this transition was appropriate.?Prime brokers, dealers, and service providers, along with the buyside,?lead what appears to be a successful implementation. There have been some news outlets that reported the DTCC fail rate for the first few days increased to 2.7% from 1.86% and we expected that.? What one needs to remember is that not every fund or business was able to prepare for this or shoulder the expense of the model we chose to employ based on the number of trades they execute.? But for larger market participants the process seems to have been smooth and with limited negative impact.

As of now, Europe and Asia?will continue a T+2/T+3?settlement cycle.?This disparity is something the markets should move to correct ASAP, as disparity in settlement dates with the US market could potentially create challenges for cross-border transactions and global market efficiency. Harmonizing settlement cycles across different regions could help streamline international trading and further reduce risks for investors and counterparties globally. As such, we look forward to the rest of the global financial markets making this important change.