Posted: 02/10/2024 | Read time: 4 minutes
As the North American market undergoes a seismic transformation with the implementation of the T+1 settlement period, the question remains: are UK firms ready?
The fundamental overhaul that firms will soon have to undertake will shape the future of market operations and bring globe-spanning implications. In stark contrast to the move from T+3 to T+2, when the US was forced to play catchup with the UK, to remain competitive EU and UK firms are now forced to adapt to the US T+1 way of thinking.
Moving to an accelerated settlement cycle like T+1 will require firms across the financial services industry to make significant changes to their operations. Where T+2 allowed for more leeway in addressing discrepancies, T+1 demands immediate action, significantly raising the stakes for back-office operations, with little room for error, and placing more emphasis on trade date reconciliation.
As the UK commits to its own T+1 transition by the end of 2027, the message for UK firms is clear: to keep pace and adhere to settlement within this new boundary, investment in automated reconciliation technology is critical to increase the timeliness of when trade date reconciliations can be performed.
Eventually, every firm will need to embrace this transition – companies that fail to do so effectively and innovatively risk falling behind.
Why is T+1 so important?
There is enormous incentive for alignment between UK, EU, and US settlement periods. Just months after the US switched, there have been reports that T+1 has resulted in asset managers needing to cover ‘significant funding gaps’ when navigating T+2 regions. The shift appears to have negatively impacted European investors, so anything firms can do to speed up the change should be welcomed, even before the 2027 cut-off date.
The change has been brought on by a myriad of factors, but chiefly, a desire to reduce risk. The more time between the trade date and settlement date invites more risk of the trade failing due to discrepancies or market fluctuations that may arise and go undetected until it’s too late to be resolved. The longer settlement window of T+2 increases the volume and value of outstanding trades pending settlement (two days of trades, rather than only one in T+1), opening the door for liquidity and settlement risk. Essentially, less time creates less risk.
However, as they are be beset by manual and legacy systems, UK firms may start buckling under the weight of the reduced settlement period. Internal operational processes and architecture will both need overhauling to avoid any potential failures. Humans are simply incapable of quickly sifting through the amount of data this change will generate and, on top of this, they will have even less time to detect, investigate and solve discrepancies, opening the door for risk.
Those that rely on manual processes will find it much more difficult to keep up with the pace necessary to process, confirm, and settle trades within a single business day. The reduced time available to resolve discrepancies means that manual processes will be less effective to manage the enormous quantities of data that are involved in trade reconciliations. Thankfully, there’s a solution.
Alleviate the workload with automation
Firms that fail to implement automated systems will be unable to compete. But even as the deadline approaches, many firms may be tempted to delay their T+1 preparations, believing they have time to spare. This invites the risk of falling behind, something that must be avoided, especially as various global markets adopt even faster settlement cycles, such as China experimenting with T+0, or same day stock settlements. With the EU planning to align with the UK by 2027, forward-thinking UK firms should take advantage and proactively implement automation now to ease the load and overtake their competitors.
A critical aspect of this is reconciliation. Normal post-settlement reconciliation will still take place the day after settlement, but automation makes trade date reconciliation possible, ensuring agility in a market that demands quick error detection and adjustments, and reduced operational risk ahead of settlement.
A key benefit of automation is that it gives firms the means to achieve trade date reconciliation by identifying errors that are likely to impact settlement ahead of the settlement date – the main challenge a reduced settlement period presents. With such technology, innovative UK firms now have the opportunity to distinguish themselves from those hindered by legacy systems and outdated processes, fuelling innovation and growth in a global market where faster trade cycles have become the norm.
If you are preparing for T+1, we can make sure you’re ready. Our end-to-end automated reconciliation software ensures you can reconcile the moment your data is ready, reducing the possibility of failed trades.
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