Increased settlement fails inevitable with US T+1 migration

The implementation of next-day, T+1 settlement in the US will lead to a spike in fails which will require firms to address their exception management processes, an expert has said.

Daniel Carpenter, chief executive at Meritsoft (a Cognizant company), said: “One of the issues banks will face under T+1 is how to consolidate and normalise their settlement fails into one place so that any associated costs can be accurately reconciled.”

“The questions firms are now asking are: How do we allocate who’s at fault? Why did it fail? Who missed the mark? That’s all part of Meritisoft’s initial CSDR solution, which we’re now building on to help firms understand where remediation efforts should be focused in an increasingly compressed timeframe.”

The chief executive said London-based Meritsoft has been delivering phase two and phase three functionality across the whole process, with the firm diving deeper into how it analyses operational deficiencies. He said the normalisation of data is key, and the next step in that journey is applying machine learning (ML) and artificial intelligence (AI).

Carpenter said US T+1 will draw on some of the work done closer to home: “In Europe, the CSDR penalty regime was designed to bring about a reduction in fails but latest numbers suggest a negligible rise in fails actually.”

He said that Meritsoft has normalised data from multiple systems into a central repository. Having the data, the firm can analyse and work out why settlements are failing, where they are failing and who they are failing with to provide settlement efficiency reporting.

“What’s happening is that people are saying, well, if you’re failing on the back of the logic of CSDR, then people are going to start charging when things fail at T+1, whether it’s in the US or in any other market around the world,” said Carpenter.

“With T+1 in the US, if the firm fails the settlement, they can be charged interest on the fail. If, as predicted, there are substantially more fails, those interest charges will rack up. Particularly now, in a higher interest environment, those additional operational costs are a big driver to resolve those failures.”