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Getting to T+1

Overview

The securities industry is changing very rapidly and extensively but only through the continuous need for overall improvement of the trading cycle.  Currently, over half of the securities instructions require some form of repair or query, with about 15% of the trades failing to settle.  This results in the accumulative costs to the securities industry reaching nearly $12 billion annually. Despite this, the industry has seen a huge increase in the volumes traded.

To meet these challenges, one of the major initiatives in 2002 which was triggered, included the reduction of the settlement period to T+1 (however most experts agreed that 2003/4 was more realistic if the implementation started at the time the initiative was set).  This will cover all debt securities, corporate equity and some non-mortgage backed US securities.  What this means in practice is that as soon as the trade has been executed, all the validation, reconciliation and settlement processes have to be completed and transacted by the next trading day.  Whilst this is already in place for US treasuries, it is far from the case for the other instruments.

 

Having a shorter settlement period will bring many benefits including:

  • Reducing the counterparty risk - less time for the counterparty to default.  It is estimated that the exposure for U.S. settlement risk will reduce by 67% compared to T+3.
  • Reducing settlement costs - estimated to about $3billion annually.
  • Opening of new funding opportunities.
  • Meeting the demand for quicker settlement by the customers. 

 

Moving to T+1

Fully integrated processing with large scale automation and Straight Through Processing .

Getting to T+1

Getting to T+1 will not happen without large scale integration of the Operations environment.  At present, much of these processes are somewhat desperate and require much intervention right from the confirmation and settlement to reconciliation.  The situation is compounded when the different processing centers around the world are considered. 

Some of the changes within Operations will also include:

  • The trade agreement process - with the reduction in the settlement period, an automatic matching and agreement process is essential as this will minimise the need to produce and match confirmations.  However, this will be dependent on the availability of quality electronic data and powerful utilities for the agreement process.
  • The settlement processes - with earlier notification of trades, both the credit and risk management cycles will have to be made more efficient and effective.
  • Focus on real issues - much of the trade processing should complete successfully, and where problems arise they will need instant identification and a rapid resolution.  With the increased standardisation of the processing cycles, powerful exceptions management tools will be required - these will not only identify the problem but also monitor and maintain audit trails for subsequent analysis.

One thing is for sure, T+1 will not happen unless the various areas of the industry move together.  When this happens, those who are not ready for T+1 will be left behind.
Our offering

Getting to T+1 will be very much part of the STP initiatives as it will be the enabler in reducing the settlement period to T+1 - this may in due course result in same day settlement (T+0).  However, prior to this much analysis and design will have to be completed with each process change being carefully evaluated and the business benefits derived.

At ILLY we have a sound business understanding, helping provide business solutions and support to implement change. Getting to T+1 will require much change - within some organisations it will be governed by the appetite for change and level of resources available. This is particularly acute with the specialised areas of banking - especially Operations where both the audit and reporting requirements are high. 

At ILLY we regard our business clients as our partners to whom we offer a guaranteed service which is based on our three founding principles:

Customers are the reason we exist

Quality is not for compromise

Focus and Delivery are our Strength

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