Adapting your IT infrastructure for T+1

On 28th May, the US, Canada and Mexico made the much-anticipated shift to T+1, settling securities one-day post-trade instead of two. The aim of the accelerated settlement cycle is to lower latency, reduce risk and promote greater efficiency and liquidity in capital markets, but also brings a range of operational challenges.

In this Q&A, Guy Warren, CEO at ITRS, discusses everything you need to know about the transition to T+1, including:

• How the industry has fared post-implementation. 
• The impact of T+1 on back-office staff and tech teams.
• The steps that financial institutions can take to adapt to the accelerated settlement environment.

How has the finance industry responded to T+1 so far?  

“The move to T+1 in the US heralds a major shift in the financial landscape, and by most accounts, the implementation seems to have gone pretty smoothly. 

“Prior to the go-live the vast majority of firms participated in multiple industry-wide testing cycles, so market participants were well rehearsed in adapting critical functions to the one-day settlement deadline. Likewise, major financial market infrastructures like the DTCC have been proactive in providing education and resources to ensure all participants understand the changes and can adapt accordingly.  

“However, as is the case with any big chance to the financial services landscape, I would be surprised if there were no bumps along the road. It will inevitably take the industry a bit of time to adapt fully to T+1 and it’s possible that we could still see a spike in operational glitches and additional costs for firms involved in the trading and settlement of securities.”

Do you think the technology used by financial services firms is adequate for T+1?

“It will become clear for financial services firms over the next few months whether their technology is adequate for T+1. The switch to one-day settlement requires continuous planning, testing, systems development and integration, posing significant operational and technological challenges.  
 
“Many firms have been leveraging new technologies like automation to support swift trade validation, error detection and the general streamlining of operations, which will help relieve pressure from back-office staff. What’s important is that firms now don’t take their foot off the gas. Continuous investment in technology and ongoing improvements will be necessary to address any emerging issues.” 

Where do you think weaknesses are likely to be? 

“The reduced settlement period will significantly increase the workload of back-office teams, who will be under a lot of pressure to make sure IT operations adapt smoothly to this transition. This is because tasks such as trade matching, reconciliation, and exception handling will need to be completed within a much shorter timeframe, which could lead to higher rates of human error and operational bottlenecks.  

“Staff in Europe and Asia may also be required to work longer shifts, and post their own trading hours, due to the time difference with the US, which further increases the risk of innocent mistakes due to stress or fatigue. As a result, some firms may look at spreading the trading day workload across multiple geographies in a ‘follow the sun’ model, but this still requires a lot of planning and will potentially be more expensive to throw more people at the same problem. 
 
“There are also liquidity risks that add further complexity to T+1. Under T+2, firms had an extra buffer day to arrange financing for purchase obligations or shift funds between accounts to cover any shortfalls. The new one-day settlement system will require firms to manage liquidity more tightly, as there will be less time available to arrange this financing.” 

How can firms best ensure that their systems are resilient enough to meet T+1? 

“Updating legacy frameworks with new technology will be key to helping firms ensure their systems are resilient enough to meet the demands of T+1. Introducing new technology such as monitoring and observability tools can not only help financial services firms streamline their back-office operations, but also provide them with far more visibility over their IT estate. Monitoring tools enable tech teams at banks to view their back-office through a single pane of glass, meaning they can detect and respond to issues faster should they arise. 
 
“Establishing a clear responsibility model is also essential for effective incident management and response. This includes identifying key stakeholders, assigning specific duties and establishing communication channels for rapid response and resolution. By clarifying roles and responsibilities, firms can create a far more streamlined decision-making process, enabling a more agile and cohesive response to IT challenges. As part of this, institutions should practice scenarios that could occur and rehearse responses.    

“Finally, while many financial institutions will have conducted regular stress-testing in the lead up to T+1, they should make sure to continue with ongoing risk assessments. Tech teams should analyse critical business functions, systems, and processes to understand how they perform under the shorter settlement deadline window. These assessments provide valuable insights into where enhancements or adjustments are needed to avoid IT hiccups down the line.”