T+1: Large Scale Progress Requires Ambitious Solutions

CJ Emson

July 2023

We stand once more at the precipice of change. The directive from the SEC to reduce the securities settlement cycle from two to one day after the transaction (T+1) will impact the long-term future operating model for the entire financial sector. Preparing to support accelerated settlement requires commitment to the automated solutions which will support T+1 in Canada and the USA and pave the way for other regions to follow with T+1 and even T+0.

What is T+1?

The move to a shortened settlement cycle for U.S. and Canadian market participants, set by the SEC to be enacted in May 2024 for North American market participants, is covered in more detail in our “What is T+1?” analysis here. In general terms, settlement cycles will be reduced by as much as 96 hours in some cases to 24 hours, e.g., T+4 settlements for transactions agreed after 4:30 p.m. EST. In current practice, this shorter settlement cycle presents a number of operational problems linked to time zones across global trading partners and in current practices which facilitate legacy inefficiencies.

T+1 Challenges an Accepted Set of Inefficiencies

With regulatory change perpetually on the horizon, firms are looking to technology to support their operations now, and to futureproof their tech stacks as regulatory advancements and pressures set the agenda for investment priority. Opportunities to improve upon the layered process inherent in complex trades are welcome.

Inaccuracies at the top of a trade with multiple parties can result in late settlement fees and other penalties which serve only to reduce margin, furthermore these inaccuracies have the potential to increase liquidity risk as the reduced timeframe to settle securities finance transactions prevents all important shorts coverage. Equally concerning are the challenges of collateral availability; funding requirements need to be sourced faster leaving little room for error. Add in the extended recalls deadline of 23.59 p.m. EST and securities finance firms will need to mobilize liquidity quickly and accurately, often within one business day. The challenges are real and are raising questions across the entire trade lifecycle. The cost of fails prevention may feel high but long term, the ongoing costs to maintain inefficiencies rather than fund improvements in the system are greater again.

Ensure T+1 Readiness With EquiLend

Technology is the solution to meeting the day-to-day operational demands faced by participants in the global markets. EquiLend has a 22-year history of bringing standardization to trade execution, lifecycle management and regulatory compliance, from the industry wide adoption of the NGT trading platform to our latest innovation – 1Source, our distributed ledger-based technology (DLT) which will transform the industry as a single source of truth for securities finance transactions. Critically, 1Source’s transaction and lifecycle data synchronization across all participants means settlement on T+1 or indeed, T+0, is a much simpler proposition.

We continually monitor where the market is headed tomorrow so we can deliver solutions for our community today. This future-proofing mentality means our solutions already support T+1 today. Utilizing pre-matching and automated execution on EquiLend’s Next Generation Trading (NGT) platform, firms can avoid the 30% break rate typical of manually processed trades enabling more efficient trading downstream. A recent NGT enhancement, Competitive Bid, further enables on-platform execution for hard-to-borrow and specials, in addition to existing widely used functionality for general collateral (GC) trading. The addition of real-time capabilities to our point of trade solutions supports further T+1 readiness and paves the way for T+0 transactions, the next roadblock on the road to greater trade efficiency. 

In addition to liquidity risk and the problematic speed of funding under T+1 as covered above, efficient exchange of collateral is another element which could threaten trade settlement in the shortened cycle, is easily supported with our Post-Trade Solutions, which offer optimal efficiency in all operational processes. EquiLend Exposure (collateral management), Settlement Monitor (track and eliminate settlement threats), Recalls, Returns and Mark-to-Market Comparison offer market participants opportunities to streamline and centrally manage all aspects of the trade lifecycle. EquiLend’s flexible and interoperable suite of services allows firms to create a tailored package of interconnected and automated solutions which addresses their specific business requirements, ensuring optimal trade efficiency, the gold standard in supporting T+1.

Futureproofing an Industry

Big change for big progress. Delivering reduced trade latency, improved accuracy, better collateral mobilization and street-level transparency powered by real-time data across the full trade lifecycle is not wishful thinking. Utilizing technology to improve future outcomes is a current reality for firms utilizing our comprehensive solution set. With North America making the change to T+1 and driving the advancements needed to support this ever decreasing timeline from trade to settlement, the global opportunities are wide. India and parts of APAC have already made the switch. European markets can be considered a likely future region to do the same.

The future of finance sits comfortably with the advancement of technology where incremental efficiencies can be gained with strategic use of fintech solutions. An efficient new future, one in which T+0 is easily possible, is a positive side effect of ensuring T+1 readiness now.

Who We Are

EquiLend is a global financial technology firm offering Trading, Post-Trade, Data & Analytics, RegTech and Platform Solutions for the securities finance industry. EquiLend has offices in North America, EMEA and Asia-Pacific and is regulated in jurisdictions around the globe.