The securities industry is moving towards shorter settlement cycles to reduce risk and increase efficiency. The last reduction in settlement windows in the U.S. was in September 2017 when settlements moved from T+3 (three-day settlement) to T+2. In February 2023, the U.S. SEC announced that all companies trading securities on U.S. exchanges needed to move to T+1 settlement by May 28, 2024. Canada has indicated their markets will align with this settlement timeframe and other global markets are also considering alignment. Eventually, all markets will reduce their settlement times, as they have done in previous rounds, to remain competitive globally.   

In this blog, I look at the challenge of shorter settlement cycles and how Capgemini is helping clients tackle the challenge.

The Challenge of Shorter Settlement Cycles

Reduced settlement times provide two primary benefits:

• Reduction of margin required to be posted at DTCC to insure against the risk of adverse market moves during the settlement period before security is delivered
• Increase in capital available for reinvestment in businesses, due to the above reduced margin requirements and access to settlement funds one day earlier.

However, there are risks to counterparties in implementing shorter settlement times. Major risks include:

• Shorter deadlines require greater accuracy and faster processing of trades. This means financial institutions need to increase their automation of settlement processes to reduce manual error and increase execution speed
• Trading in multiple markets, with different daily deadlines, means the effective daily deadline is even shorter for certain multi-market trades. The cost of an error and the difficulty of syncing counterparties is much more difficult than in a multi-day settlement process (and will be exponentially more difficult under a T+0 deadline). Again this places more pressure on settlement systems to be fast and accurate
• Ancillary activities, especially securities lending, are heavily impacted. Securities lending are likely to generate a higher level of fails, and fails can eliminate all the profit from the lending contract. Again, the new process will need to be robust enough to reduce fails to a level where lending activities are not driven to be unprofitable
• Trading volumes are not spread out evenly during the day. The majority of trades typically occur near the end of a trading session. Batch processing of trades under a shorter deadline is likely to have an adverse impact on the ability to affirm trades. In a T+1 environment, there is simply much less time to take most of the trade volume and process it in the window available.    

Transforming legacy settlement systems in the 12 months remaining to go-live will be difficult. Depository Trust and Clearing Corporation (DTCC), which provides clearing and settlement services to the U.S. markets, recently surveyed its clients and found that over 50% are unsure they can meet the deadline. Most will have to turn to third-party help to implement the complex process and infrastructure changes required.

Capgemini’s Approach

Capgemini has built an offering to support industry participants looking to transform their legacy environment in time for the deadline. The key components of this offering are:

• Readiness assessment: assessing the client’s legacy platform, which requires highly specialized knowledge due to the nature of capital markets' post-trade systems
• Solution design and implementation planning: designing solutions that increase post-trade automation and implement these solutions on top of the existing platform  
• Implementation: implementing a regulatory-compliant solution in an environment that is delivering high-volume ongoing services daily   
• Testing: internal testing to assure success with the custom internal platform and external testing to coordinate with industry and regulatory partners
• Post-go-live remediation: to fix flaws and upgrade solutions over time
• Managed services: ongoing support as required and/or full outsourcing.

The key success factors for these projects are:

• Effective data management, which is critical to delivering the clean data required to meet deadlines by avoiding disputes 
• Rapid automated processing to reduce manual errors
• STP to enable firms to meet regulatory deadlines.

Delivering these services successfully in a compliant fashion requires industry experience and a methodical plan to address each participant's custom environment. Achieving a compliant launch for complex custom systems in a 12-month timeframe, when over half of the participants are unsure they can meet the regulatory deadline, will require participants to use best practices as soon as they evolve within the next 12 months. 

The business impact of successfully transitioning to shorter settlement deadlines is that counterparties will free up working capital to reinvest in their businesses. Collectively this will generate greater industry liquidity and reduce transaction costs for both investors and issuers. Greater market liquidity will allow more efficient markets to put more capital in both investors’ and issuers’ pockets.     

Support from third parties will assist organizations with industry coordination and best practice adoption on this fast-track systems conversion project. Capgemini is well placed to capitalize based on its new offering and its track record in successfully assisting clients with T+3 to T+2 transition.