In May 2024, the U.S., Canada and Mexico cut their
Broker-dealers, custodians, clearing companies and institutional investors have had to upgrade their operations and technology to comply with this regulatory change. Both U.S. and foreign participants in the U.S. securities industry rose to the challenge presented by the short time frame for such a major market change.
The SEC announced its T+1 rules just 15 months ahead of the go-live date. “This was the largest transformation project in the U.S., Canadian and Mexican markets, and it occurred without any hitches,” said Vinod Jain, strategic advisor, capital markets, at Datos Insights.
According to Michele Pitts, Citi’s global head of custody data, securities services, significant work occurred throughout the industry to ensure that systems were updated, processes were reviewed and all parties were aware of their roles. There were also multiple rounds of tests in the lead-up to go-live in May, which was critical in ensuring a smooth transition for market participants and customers.
Citi’s T+1 migration was an 18- to-24-month journey, with a focus on client engagement, internal processes and technology. Its move away from batch processing several years ago made it simpler to identify required configurations and make necessary changes, Pitts said.
Speeding up processing through different international time zones was a challenge. Many of the larger global processing companies and service providers incurred office relocation costs in order to be able to work in U.S. and foreign time zones, said Rich Robinson, chairman of ISITC.
During the transition period, Citi worked with teams across multiple geographies and functions, colocating staff from its product, operations and technology teams.
“Leveraging a follow-the-sun model, we tracked changes in real-time to inform our decision-making as we approached go-live,” said Pitts. “We were also able to quickly address any client queries that came up during the transition.”
BNP Paribas met migration challenges by setting up a dedicated T+1 task force to ensure readiness internally and engage with clients and counterparties. Its existing state-of-the-art U.S. custody system was an important asset, but there were also in-depth reviews of multiple processes that led to further automation, said Stanislas Beneteau, BNP Paribas’ head of financial intermediaries and corporates client line Americas, securities services.
“The industry’s transition weekend and first week went well, with any minor industry issues quickly remediated,” said Beneteau. “The industry continued in hyper-care mode for several weeks in the early summer to ensure new edge cases were addressed quickly.”
Post-T+1, BNP Paribas’ Securities Services business met or even exceeded industry metrics. This was noteworthy, as a significant number of its U.S. custody clients were international firms outside the U.S. with complex time zone and funding challenges, Beneteau said.
Charles Schwab’s migration to T+1, which included participating in industry and vendor testing and updating internal processes, went smoothly with no client-facing issues, said Jan Hanshaft, Schwab’s managing director of operational services.
Bloomberg set up a testing environment in summer 2023, so clients could test workflows and downstream integrations well ahead of T+1. The change of settlement date impacted price calculations across its products.
“We needed to optimize our VCON trade confirmation system to use the right settlement date in every country as it relates to the T+1 transition,” said Mark Deroudilhe, Bloomberg’s head of core rates product. “We have hundreds of calc types for our fixed income instruments and we ensured all of them were ready for T+1.”
Process transformation, more than automation, was where most of the change happened, Datos Insights’ Jain said. The U.S. T+1 migration didn’t require major overhauling of legacy systems used by the industry, but did require significant changes to workflow configurations, he said.
A global survey by the Depository Trust and Clearing Corporation, or DTCC, and TMX in January 2024 found that process transformation, which 87% of respondents were working on, was twice as important for T+1 as automation, which 43% were implementing.
The migration has paid off by reducing pre-settlement risk. It has lowered the margin collected by the DTCC-owned National Securities Clearing Corp’s, or NSCC, clearing fund by approximately $3 billion (23%), according to BNP Paribas’ Beneteau. The freed-up capital can now be used more efficiently, resulting in lower costs for investors and increased market liquidity, he said.
The migration’s secondary objective was to encourage firms to automate and reduce processing costs. “Surveys and anecdotal evidence suggest this hasn’t always happened,” said Beneteau. “Many firms, particularly smaller buy-side firms, say costs have increased with more staff required. However, now the transition is complete, more firms may be able to re-engineer processes and automate functions, particularly those actioned outside normal office hours.”
ISITC’s Robinson also sees a lot of potential for replacing manual transaction processes that use faxes or emails. “For second- and third-tier businesses, investment in automated systems can get expensive, and many firms’ version of automation is auto-faxing or auto-e-mailing PDFs or spreadsheets,” he said.
An important gauge of the U.S. T+1 migration’s success is the failure rate, which has remained in line with T+2 failure rates of around 2%. According to the DTCC, the average fail rate on the NSCC’s Continuous Net Settlement core netting and allotting engine in July 2024 was 2.12%.
Another metric is the marked improvement in trade affirmations by the 9:00 p.m. ET cutoff. These improved from 73% of transactions in January 2024 to 95% in September 2024, according to the DTCC.
The move to T+1 is a global one, with China and India ahead of North America. In Europe, the U.K. and the EU have announced plans to firm up dates for adopting T+1. “This indicates that the industry views North America’s transition as largely successful,” said Monica Summerville, Celent’s head of capital markets.
For the Bridgewater, N.J.-based ISITC, a major challenge was communicating awareness of the U.S. mandate to global participants.
“Surveys showed that, even six months prior to T+1’s implementation, most European and Asian firms didn’t think T+1 affected them,” said Robinson.
Consequently, the DTCC and global custodians such as Citi and State Street did a lot of road shows explaining to international clients that T+1 affects them when they invest in the U.S. and that they need to have the funds in place before settlement.
The upgrades that international players have made to comply with the U.S. T+1 mandate will speed up the global migration to T+1. ISITC, whose members include the London Stock Exchange Group, Canada’s TMX and the Society for Worldwide Interbank Financial Telecommunications, is developing ISO 20022- and 15022-based market practices to facilitate increased automation and operational efficiency to help T+1 adoption globally, Robinson said.