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Martijn Groot, Alveo
Martijn Groot, Alveo

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The answer to the T+1 challenge: Data-driven technology

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Martijn Groot, VP Marketing and Strategy, Alveo, writes that 15th February 2023 proved to be a red-letter day for routine securities trades. 

The Securities and Exchange Commission in the United States incorporated a new rule amendment which meant that one day settlement cycles after the trade date would become commonplace, as opposed to two. This change, described as moving from “T+2” to “T+1”, will come into play on May 28th 2024.

The intention behind this reduction of settlement time is to increase efficiency and reduce risk in financial markets, including credit, operational and liquidity risk. Exposures will be lower, leading to a reduction in collateral requirements as firms don’t have to post as much margin into clearing houses.

On the other hand, the changes require financial services firms to run their post-trade operations under much-reduced timeframes as settlement windows become shorter. As this time buffer is drastically shortened, there’s little chance for intervention, reconciliation or rework, so business processes and system integrations need to be considered to identify where improvements can be made.

The reference data, which incorporates legal entities, financial products, corporate actions and standing settlement instructions that drive the settlement process, must be 100% accurate. This includes the correct identification of financial products and counterparties, terms and conditions of those products as well as information on accounts, exchanges, clearing houses and corporate actions such as dividend dates. Accessibility and consistent access from varying applications and parties is also critical. There’s unlikely to be enough time to correct errors, leading to more expensive mistakes if something goes wrong. The pressure is on data management, quality and shared access to the right information.

Driving improvements in data quality and automation

With Europe now needing to follow in the footsteps of North America, it’s time for financial services firms to take action. However, inefficient IT infrastructures that have remained in place for decades will prove to be a blocker to progress.

Financial services firms will also have to deal with a range of other challenges in regard to the European securities markets as settlement cycles reduce to T+1. Unlike the seamless application of regulations across North America, it’s more complicated in Europe due to different Central Securities Depositories across the continent. If a foreign exchange component exists in trading, this can add complexity as these markets largely persist with T+2 settlement terms.

There have been some positive elements over the last few years when it comes to running effective post-trade operations. We’re seeing new data and service offerings coming into play that provide master data feeds that are aggregated from different data sources, are validated and then offered in different ways to easily integrate with different business applications and reporting requirements.  Transparency into data consumption and provenance of data sets is typically part of these services. This Data-as-a-Service approach is a lightweight form of outsourcing that allows firms to retain complete flexibility and autonomy in how they run their operations.

This Data-as-a-Service trend is gaining traction due to expensive trade breaks and the limited opportunity that businesses get to address them under T+1 rules. The result is improvements in data quality and automation. Data-as-a-Service has become particularly valuable because it straddles the line between in-house technology deployments and the benefits of an outsourced back office. The foundational layers are those that are frequently outsourced, including security master, legal entity information and standing settlement instructions (SSI).

Data-as-a-Service equates to state-of-the-art data collection and validation, which is ideal for T+1 requirements. With providers operating this service for numerous businesses, they carry the collective knowledge of the industry to drive best practice and improve their offerings to organisations.

Accessing the opportunities brought about by the change

The transition to the T+1 settlement cycle is significant change for financial services firms. While it is one that presents challenges, it also brings a number of opportunities. The first step is for organisations to modernise their IT infrastructures to ensure that legacy equipment doesn’t hold them back from innovation. Business processes must be fine-tuned to ensure that the organisation is prepared for its introduction. Secondly, Data-as-a-Service models will provide the best of both worlds to businesses by allowing them to keep relevant technology in-house while leaving the time-sensitive tasks to an outsourced data management function. Automation can ease the burden by streamlining projects. By grabbing the opportunities available, firms can reduce risks, enhance efficiencies and push competitive advantage in the market.

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