T+2 shortened settlement cycle update: Trade processing

Are your T+2 trade processing changes on track?

Q1 2016 is behind us and the migration to a shortened settlement cycle (T+2) is fast approaching. To be ready for industry testing—and to meet the targeted migration data of September 5, 2017—organizations should be completely finished with development, implementation, and internal testing of their modified trading systems, reference data, and trade processes by the end of 2016. Between now and then, there is a lot of work to do, and not much time to do it.

Getting started

The move to a T+2 shortened settlement cycle will have a significant impact on systems and processes across a wide range of areas, from order management through post-settlement. While the individual changes are expected to be relatively straightforward, their sheer breadth and volume make it important to stay on schedule.

For organizations just getting started, a good first step is to conduct a thorough trade processing assessment—including a complete inventory of affected processes—to help identify required activities and resources and budget for additional resources, hardware, and software. When planning, organizations should also consider the availability of IT personnel with in-depth knowledge of their internal trading systems (including legacy systems). Early review of trade processing could also provide opportunities to improve your organization’s operating infrastructure and transform the way your organization effectively addresses business, technology, and operational risk.

T+2 shortened settlement cycle update: Trade processing

Where do you stand?

To determine if your T+2 shortened settlement cycle migration efforts related to trade processing are currently on track, ask yourself the following questions:

Unless you can confidently answer all these questions, your T+2 team might need to pick up the pace. Lagging behind could have significant consequences for your organization’s reputation and financial results, including trades that fail because they cannot be settled in a compliant manner within the required timeframe.

Critical issues to consider

As your organization prepares to execute the required changes starting in Q2 2016, there are a number of issues to consider at various points throughout the trade lifecycle.

Order entry and trade capture
Organizations should take a hard look at how they pool trades for order entry management and then determine if these processes need to be completed more quickly for T+2 settlement. Also, manual order entry processes and procedures should be reviewed and updated as needed. Coordination with vendors and service bureaus will likely be necessary to determine if any of their processes for order-entry management and trade capture need to be changed. Other important considerations include mutual fund “ack/nak” procedures and the timing for resolving “nak” trades to maintain the correct price and settlement.

Payment mechanisms and trade funding
Check and Automated Clearing House (ACH) processing will need to be completed more quickly to ensure cleared funds are available for settlement on T+2. Also, it is important to consider any changes that might be required to trade funding processes and procedures (and the subsequent education and communication that will be necessary to keep customers informed). Although the changes in this area are expected to be relatively simple, even small changes can create a significant amount of risk.

Trade matching and affirmation
The Depository Trust and Clearing Corporation (DTCC) has new cut-off times for trade matching and affirmation in Real-Time Trade Matching (RTTM) and Omgeo. Organizations need to look both at legacy and vendor or service bureau systems and processes to ensure the new deadlines can be met. Also, changes to trade matching and affirmation may require changes to service level agreements and procedures. When implementing changes for T+2, organizations should review the percentage of trades that are currently not matched quickly enough to meet the new, shorter deadlines. They should then determine if any changes are needed to internal controls and policies in order to decrease the number of failed trades.

Physical securities delivery
Organizations should consider what percentage of their trades involve physical securities. They should also consider what percentage of physical securities are for sale and determine whether to increase efforts to dematerialize remaining physical securities.

Stay tuned

The SEC has indicated support for the planned transition to a T+2 shortened settlement cycle and expects to issue preliminary proposed rules by the second quarter of 2016. In the meantime, other regulators—including FINRA, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and various self-regulatory organizations—have already submitted notifications of proposed rule changes to the SEC.

The migration to T+2 is an important breakthrough for the financial services industry and as such, it is important to get it right. Financial services providers that fail or fall behind could be in a difficult position as the rest of the industry moves forward. That being said, the good news for organizations just getting started is that it is not too late to pursue an accelerated implementation plan and get caught up on the critical path.

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