Transitioning to T+1

Welcome to the inaugural edition of TradingTech Buzz, our Fintech Newsletter.

Let's dive in and explore the pulse of Fintech together!

SEC gears up for the T+1 rule change in May 2024

The move from T+2 to T+1, is a crucial step. The financial industry is on the brink of a transformative shift in settlement cycles.

Here we dissect the catalysts behind the T+1 mandate, its implications, and how market players can gear up for this accelerated settlement era.

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

News Roundup!

• Proposed US Bank Rules Could Increase Capital Requirements for Derivatives Clearing Services by Over 80%, Warns FIA
• Revolutionizing Trade Settlement with Tech: The Power of Outsourcing for Unleashing New Opportunities in T+1 Era
• Accelerating the settlement cycle to T+1: Navigating the digital brokerage revolution with prime brokers at the helm.

Getting back to the Reasons Behind T+1 Mandate

1. Pandemic's Impact on Back-Office Automation:The lockdowns during the pandemic highlighted the urgency for back-office automation. An April 2021 DTCC whitepaper reveals how the sudden surge in trade volumes and the need for remote work setups propelled the industry toward a more efficient and automated approach.
2. Volatile Markets and Margin Fees:In the past two years, Meme stock trading (Gamestop & AMC) spiked margin fees, leading DTCC to suspend trading. Accelerating settlement to T+1 addresses the need to lower capital requirements for broker firms amidst the challenges of increasing trade volumes and margin fees.
3. Rise of Digital Assets:BNY Mellon's Feb 2021 press release on a digital custody platform marks a pivotal moment for capital markets. With Digital Ledger Technology (DLT) and digital assets gaining traction, central banks move towards Central Bank Digital Currencies (CBDCs). These new asset classes demand faster settlement, driving the pursuit of real-time or T+0 as the ultimate goal.

Benefits & Challenges on Market Player

Three Key Benefits Of Transitioning To T+1

1. Counterparty Risk Reduction And Market Exposure:

• By DTCC’s estimates, removing one day’s exposure to risk could translate into a 41% reduction in CCP margin requirements.
• Quicker access to funds during market volatility. As underscored by March 2020 and January 2021, its resultant impact on variation margin in cleared trades.

2. Increased Liquidity For Investors:

• T+1 settlement enhances operational efficiency by reducing settlement times and streamlining the trading experience.
• Automated and modernized execution-to-settlement using API integration, processes minimize manual workflows resulting in significant cost savings.

3. Market Stability:

• The reduced time gap between trade execution and settlement increases market stability.
• Shorter settlement cycles under T+1 mitigate the impact of operational disruptions.

Industry Readiness – How Can Brokerage Firms Prepare For T+1?

In an April 2023 interview, David Kirby DTCC Executive Director, emphasized the urgency for firms to conduct impact assessments, evaluate counterparty behavior, and enhance technology solutions. The transition requires careful coordination, balancing efficiency, and avoiding unintended market risks.

AI for Post-Trade

Generative AI can optimize manual workflows in post-trade settlements, (e.g., transaction details and smart contract generation), reducing manual support, and maximizing operational efficiency.

Significant Change And Program Management Efforts

As firms transition to T+1, they should prioritize enhancing existing technology solutions to further increase the straight-through processing (STP) rate and maximize efficiency. By prioritizing (STP) solutions, firms can focus on correcting legacy system’s shortcomings and reinventing archaic processes.

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To truly make an impact, it is essential to view AI as more than just automating repetitive tasks.

That’s a wrap on this edition.

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