Getting ready for T+1 will be the priority of the operations team but its benefits will extend far beyond the back office
Europe has set 11 October 2027 as the day it moves to T+1. Three separate jurisdictions: the EU, UK and Switzerland will move in tandem.
It will not be an easy task. Europe has 14 clearing houses and 32 central securities depositories that all need to be coordinated! Even within the EU, some markets are more prepared than others.
Automation of post-trade activities such as affirmation and real-time processing of trades proved essential in getting the US across the T+1 finish line – along with significant (and ongoing) headcount increases. Across Europe planning is very much underway, and if it isn’t, it should be.
For many firms, budget allocation and plans to upgrade systems are already being discussed in order to make the October 2027 deadline. This allows 2026 to be used as a year to implement new systems and software and where 2027 can be focused on testing, final preparations and gaining operational benefits in advance of the deadline.
Front to back
Securing budget is not easy. Responsibility for T+1 lies primarily with the operations team and other back-office functions to be prepared. Back-office upgrades almost always fall to the wayside, as demands from the revenue generating front office take precedent.
But there are major costs that inevitably hit deal profitability, associated with addressing T+1 manually, which should make the front office sit up and take notice.
For processes that could not be automated, either because of time or budget, staff numbers were increased as T+1 went live in the US in May 2024. A survey published in September 2024 by Citi found that 44% of firms were significantly impacted by increased headcount in the middle and back office. Half of companies indicated that securities lending and funding/margining were also severely increased due to the shortened settlement cycle.
These challenges can lead to lost revenue due to the likes of early stock recalls or holding more cash to meet funding requirements. Settlement fails also incur costs from interest claims of trade counterparties and, in the EU, regulatory penalties from CSDR.
While preparing for T+1 will be spearheaded by the back office, a front-to-back approach is needed to understand the benefits of T+1.
Being an early bird
Upgrading and automating for T+1 should not be viewed strictly through the lens of being ready for a market change. Improved settlement management will bring about capital efficiencies that could be gained even without T+1.
It is hard to fully quantify the losses caused by settlement fails. They are known unknowns. Without the transparency created by centralising all the relevant data, firms have a poor view of how fails affect their wider trading operations.
A better overview of granular data from in-house systems, custodians, CSDs and trade counterparties will help predict which firms might be more prone to fail at certain times or for specific types of securities.
This level of transparency will enable firms to make more strategic decisions, for example, on their stock lending and recall activities, which will be key given the expectation that settlement fails will increase under T+1.
It will also allow for better client engagement: practical discussions with custodians as well as brokers and counterparties who may have higher than average fail rates to remedy this.
Grounding those conversations in real data will make for a much stronger case. This should ultimately lead to improvements in settlement rates or lower fees to compensate for the additional fails.
The front office needs to be much more cognizant that if a trade fails there is a cost to that, through the added expense of stock borrowing or penalties for the fail to both the counterparty and the regulator.
Optimising post-trade
In the quest for better capital efficiency, firms have focused on what the front office knows, pre-trade. Regulation has meant best execution has been relentlessly pursued. Traders select the venue with the best price, using the right order type and trade at the correct time of day, tapping into multiple data streams to ensure best execution.
T+1 can help jump start the conversation about the reality that many post-trade processes remain unoptimised and that there are capital efficiencies to be realised.
While there is plenty of data to make sure a trader is getting the best bid/offer, less attention is being paid to how fails can influence the balance sheet. The data exists to alert a front office trader that there could be added costs to a trade by predicting when fails may occur. Historical trends can help inform future settlement fail risk, that information just needs to be captured and analysed.
As firms continue to squeeze more efficiency out of pre-trade, there are still plenty of areas left in post-trade where a central repository of settlement statuses, and resolutions, along with associated costs will help drive capital efficiency for the entire business. Through centralising data to identify at risk trades and acting fast to resolve issues that might lead to fails, the front office will see additional capital unlocked that would otherwise be trapped by slow and manual controls.
If you would like to discuss how we can assist in automating your settlement operations ahead of this significant transition, please contact us at MeritsoftCapMarkets@Cognizant.com.
To learn more about our Trade Tracking and Exception Management solution for T+1 click here.
