T+1: How a reduced settlement window will impact data

Posted: 02/10/2023 | Read time: 4 minutes

In the third issue of our blog series on T+1 settlement, AutoRek Product Manager Murray Campbell discusses some of the key impacts a reduced settlement window will have on data.

From May next year, the settlement cycle for US security trades will shorten from T+2 to T+1 – meaning firms will have just one day to complete share trades.
As a shorter settlement window gives less time to complete processes, the move to T+1 will affect firms in several different ways – the most significant of which is how data needs to be managed.

While there are many data considerations for firms ahead of the shift to T+1 settlement, we discuss the following three in this blog: Standard Settlement Instructions (SSIs); data transparency; and data accuracy and quality controls.

1. Standard Settlement Instructions

A widely known cause of settlement failures is incorrect SSIs. Where firms fail to maintain accurate and up-to-date SSIs for trading counterparties, they risk trades being instructed incorrectly and therefore failing.

The need for a manual, offline process to communicate with trade counterparts to capture accurate SSIs before amending and resubmitting instructions makes it less efficient. Under T+1 settlement, the time available for this manual intervention will greatly reduce, particularly across time zones. This places a greater premium on the value of accurate SSIs.

Firms must review their process for storing, reviewing and updating SSIs. Data inaccuracies like this should be simple to fix and will drive greater straight-through processing of trades to alleviate some of the manual burden.

2. Data transparency

Increased data transparency across the industry can play a major part in improving trade settlement rates, increasing early awareness of issues and enabling efficiency of corrections.

The need for manual intervention to investigate and correct trade fails is partly driven by the lack of transparency in the data all market participants receive. Currently, either side of a trade will only see one side of the instruction submitted. Where a trade fails to match, the two parties must communicate to investigate and resolve the underlying error.

Enhanced data transparency is therefore required across securities markets to identify potential settlement issues early and efficiently resolve errors that arise.

One example is the wider adoption of the Swift Unique Transaction Identifier (UTI). While the UTI is currently used across certain regulations (e.g. EMIR OTC derivative transactions), it is not currently adopted across securities markets. The use of the UTI, a 52-character string, would give firms greater visibility into the trade lifecycle. This would help to identify potential issues early and reduce the time spent communicating between counterparties.

Advancements of this nature require support and direction at an industry level. However, firms can also improve data transparency within their organisation. This will be key for teams to have access to greater reporting and awareness of executed trades, for example, to perform prompt cash forecasting as discussed above.

Where firms rely on spreadsheets, the analysis and reporting process is manual and time-sensitive. Enabling efficient insights and awareness of potential spikes in trade value or currency requirements relies upon an immediate view of real-time trading data. Firms must review their trade capture and reporting processes to make the most out of the available data.

3. Data accuracy and quality controls

Where firms employ multiple systems across middle and back offices, it is essential to have robust data controls in place. Accurate recording of trade details at all stages of the process will be essential to drive higher rates of automated settlement.

Intersystem reconciliations are a key control check to ensure that trade data has passed correctly from one system to the next, for example, in the exchange between Order Management and Order Execution systems. Where order aggregation occurs, firms must have controls in place to ensure the output has captured all in-scope orders.

Further automated controls, for example, validation checks on trade metrics, can also provide further verification of recorded data. While sanity checks may appear simplistic, all controls that focus on the accuracy of trade information to enable higher settlement rates and greater awareness across an organisation.

Key again for firms will be the review of current processes and data outputs and then establishing the point at which controls can be introduced.

The bottom line

As a priority, firms must review their current processes across the trade cycle and the data used at each stage. The availability of transparent data enables a higher degree of automation which, in turn, drives efficiency, reporting visibility and process improvement across an organisation.

The actions identified will vary across an organisation. However, the initial review of the operating model will capture where further work is required.

How AutoRek can help with T+1

If you’re preparing for T+1, AutoRek can help you get your operational processes ready for faster settlement times.

Our end-to-end automated reconciliation software allows you to reconcile as soon as your data is ready, minimise failed trades, save time on the pre-settlement process, and tackle exceptions quickly.