Beyond Liquidity: T+1 Testing Begins

DTCC, the US post-trade market infrastructure, formally started the testing program for moving to a shorter settlement cycle on 14 August so market participants can fully evaluate their end-to-end processes before implementation next year.  

Firms can participate in as many of the 21 bi-weekly testing cycles as they choose before testing is scheduled to finish on 31 May 2024.

The standard settlement cycle for most US broker-dealer transactions in securities will be reduced from two business days after a trade, T+2, to T+1 on 28 May 2024 in the US and on the previous day in Canada. The US Securities and Exchange Commission said the aim is to reduce latency, lower risk and promote efficiency and greater liquidity.

DTCC’s program includes opportunities for free-form testing, as well as scenarios for non-standard settlement such as production holiday processing, corporate actions and double-settlement days. Infrastructures taking part in the industry test also include exchanges Cboe Global Markets and Nasdaq, and the OCC (Options Clearing Corporation).

Michele Hillery, DTCC.

Michele Hillery, DTCC general manager of equity clearing and DTC settlement service, said in a statement that the entire trade life cycle will be available for testing, including, but not limited to trade affirmation, confirmation, clearance, settlement, and trade exception flows.

“We recommend that firms test run through scenarios where there are breaks in the system to assess recoverability and resiliency,” added Hillery. “The message should be loud and clear for everyone: test and be ready.”

A new test environment also allows clients to test in both T+1 and T+2 environments. DTCC said: “While T+1 testing for firms is not mandated by regulators or any other industry group, it is highly recommended.”

Jeff O’Connor, Liquidnet.

Jeffrey O’Connor, head of market structure Americas at global agency broker Liquidnet, said in a statement that the industry supports the move to T+1, as it will lead to a more efficient market while reducing operational cost and counterparty risk.

However, he asked: “Why would we stop at T+1 ? Doesn’t the obvious goal of T+0 equate to the least amount of systemic risk within the system, i.e., if you have the money: buy it, if you don’t: don’t.”

James Pike, head of business development at Taskize, a platform which aims to reduce manual interventions both within and between financial services firms, said in an email that pre-matching of trades is one of the biggest obstacles to achieving T+1.

James Pike, head of business development at Taskize.

“Changes to trade matching processes, including much tighter deadlines for the receipt of an asset manager’s trade instructions, not to mention the resolution of pre-trade problems, are of paramount importance,” he said. “Without this, trades cannot move into the shortened settlement cycle and will likely miss the continuous net settlement process.”

Alex Knight, head of sales and EMEA for Baton Systems, a fintech providing blockchain-inspired solutions for post-trade processing, commented in an email that T+1 will change how firms approach foreign exchange execution and settlement. For example, more trades will need to be settled outside CLS, the FX settlement infrastructure, which will result in increased settlement risk if not appropriately addressed.

Alex Knight, head of sales and EMEA for Baton Systems.

“When also considering the fact that there is going to be less time to remediate breaks in a condensed settlement window, firms have to integrate alternative and highly automated forms of payment versus payment (PvP) FX settlement into their post-trade processes to ensure effective and safe settlement after the T+1 deadline,” added Knight.

O’Connor also commented on the impact on the swaps market.

“The goal is to have the broker/dealer carry the risk to execute on a strategy,” O’Connor added. “From a fund management perspective, the risk with brokers will certainly be reduced, possibly denting what is a currently sizable market.”

He also highlighted some clearing questions that still remain:

Complications of settlement rises significantly for international traders. Typically, international accounts don’t allocate until T+1 — delaying allocations, matching, and getting set up.

Do operations get moved from the executing region to local? If they allocate 2am local, are they waiting until 8am EST for allocation execution

Is moving clients to central trade matching (CTM) the immediate goal for broker/dealers? Will there be a move to FIX allocations via Tag 1?




This article was first published in Markets Media