Investment Operations

Financial Institutions Scramble to Streamline Trade Processes Ahead of T+1

AI Compliance

The fast-approaching switch to a T+1 settlement cycle is intensifying concerns about potential breakdowns caused by firms that are still reliant on manual and inefficient processes for key middle- and back-office functions.

The U.S. Securities and Exchange Commission has set May 28, 2024 as the date that financial markets will move to next-day settlement on trades. Meeting that deadline will require sell-side and buy-side firms to work together to accelerate trade reconciliation and other parts of the trade lifecycle. However, new data from Coalition Greenwich and Xceptor highlights potential risks stemming from the fact that most market participants are still conducting up to 20% of reconciliations offline using systems and processes built in-house. Meanwhile, pockets of firms have even higher percentages. 

Manual Processes Create Risks for Missed Settlements, Possible Losses
A combination of powerful trends is forcing both buy-side and sell-side firms to make increasing efficiency and accuracy throughout the trade life cycle a top strategic priority. Exponential growth in data volumes, particularly the massive increases in unstructured data, and new regulatory requirements around data management and governance have prompted market participants to invest in technology that can facilitate those improvements by cleansing, standardizing and automating data as it moves downstream from the front to middle and back offices.

Due in large part to these investments, a majority of participants in a new research study felt their own organizations were mostly on track to begin settling securities on T+1. However, less than one-third of respondents felt they can achieve T+1 settlement in every asset class. Furthermore, 20% of respondents are also concerned that the market as a whole will not be ready for the new T+1 requirement, particularly the longer tail of smaller institutions.

“Many of these firms are struggling to streamline workflows due to a lack of data standardization, particularly with unstructured data such as faxes, emails, PDFs, and data scraped from screens,” says Audrey Blater, Senior Analyst for Coalition Greenwich Market Structure & Technology and author of Data Automation: The Workflow Efficiency Game Changer. “For these firms, a lack of automation to cleanse and normalize data could result in missed settlement timelines, inaccuracies in books of record and possible losses.”

The move to T+1 could put additional pressure on firms using in-house systems. Users of proprietary platforms have higher rates of offline reconciliation than peers using a single third-party solution. Users of proprietary systems are still often turning to spreadsheets and database software as their “solution”. The proliferation of data and process silos can also create barriers within organizations. Due to these factors, exception management within the settlement process is more likely to be a struggle as settlement times shrink.

“Firms that have traditionally relied on proprietary systems will find that ‘throwing bodies’ at data challenges becomes less effective as the trade cycle compresses,” says Audrey Blater. “As a result, we could be in for a perfect storm of smaller buy-side and sell-side firms scrambling at the last minute to meet T+1 requirements by upgrading to more streamlined technology processes.”

Data Automation: The Workflow Efficiency Game Changer analyzes the systems and approaches buy-side and sell-side firms are using for critical middle- and back-office workflow functions such as data cleansing and normalization, and trade reconciliation. The report compares the use of proprietary systems with that of third-party solutions, looking at relative performance in trade reconciliation, exception management, STP, and other key metrics.