Decreasing Risk as you prepare to settle trades by T+1


By Ryan McQueen

There are many actions involved in supporting trades, and the actions can get more cumbersome and time consuming as the trade volume or the complexity increases. Settling trades so that both sides agree what was traded, how it should be booked, and all the core economics drive a large chunk of these actions to settle the trade. Middle and Back-office teams execute as quickly as possible to settle these trades two days after the trade is agreed or T+2.

This delay between the execution and settlement of a trade creates significant risk that each side could see a trade differently and they could manage it incorrectly. 

Settling trades is hard because of reasons like these:

  1. Counterparty allocations are often delayed, incorrect, or delivered in inconsistent formats
  2. Settlement details that matter per product can be difficult to summarize and send to the counterparty to confirm
  3. Managing approved list of contacts to work with by customer is tedious and high risk
  4. Email based workflows are by nature inefficient and prone to many follow ups and misinterpretation
  5. Each settlement instructions can come from any number of formats and often require a call-back
  6. Counterparty netting preferences are often case dependent and hard to track and manage

Following the unprecedented market volatility of the past three years, numerous calls for further compression of the existing settlement cycle to either T+1 (one day) or T+0 (same day) rang throughout the industry, in hopes of decreasing the risk that firms carry on these unsettled trades.

Now, thanks to substantial advancements in FinTech which will make it possible, the Depository Trust & Clearing Corporation (DTCC), the Securities Industry and Financial Markets Association (SIFMA), and the Investment Company Institute (ICI), have announced that they will accelerate this move by imposing a T+1 requirement in the first half of 2024.

This shortened settlement cycle, will significantly reduce operational risk by reducing the number of open trades that may be subject to market volatility, reducing overall market risk and exposure. This transition also paves the way to meaningful capital and collateral savings for firms by effectively allowing them to lower their CCP (central counterparty clearing house) margin requirements. In fact, the DTCC estimates that the transition to T+1 will decrease the volatility component of the National Securities Clearing Corporation’s (NSCC) margin by 41%.

The implementation of technologies necessary to effect such a change will also create greater transparency and data accuracy across the financial system. Investors will be able to take advantage of more investment opportunities with quicker access to cash or securities and reduced margin requirements.

While it’s a positive change overall, there’s two groups that will feel the negative effects of this transition more than any other. The middle and back-office teams. With only one day to complete their numerous, multi-step settlement processes and procedures, they will be under even greater pressure, and potentially creating additional operational risk.

The risk that trades won’t settle, and will ultimately fail, will increase as the trade cycle shortens. Analysts will have less time to thoroughly review each transaction for errors and reconcile the trade. 

Manual processes across the entire trade life cycle will come under immense scrutiny. Older technologies will need to be replaced for more automated tools and advanced systems that have operational controls built in. As analysts work to reconcile trades, they will need to focus their attention entirely on exception management and correcting errors in transactions.

Firms will need to go a step further, too, examining the root causes of exceptions to improve processes and ensure exceptions are avoided going forward. Batch processing won’t cut it and tools like Robotic Process Automation will fail as they automate broken processes without identifying areas of risk or solving the problem, and struggle to be resilient to minor changes. To be successful and “future-proof,” firms must implement systems that understand and support their processes, improve them in real-time, and provide insight into where the hidden risks and opportunities are.

DeepSee identifies from emails where your problems are and then makes all the data in your attachments and systems available to settle trades.  We will help you discover the problems facing your post trade team, and give you access to our AI powered solutions that can scale your team and process so that it can meet the T+1 goal.

To learn how we can help you prepare for this shift, schedule a demo.