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Considerations for Alternatives Managers ahead of T+1

David Rochford, Global Head of Public Markets

As we approach May 2024, the alternative investment management industry joins the rest of financial services in bracing for the most significant change to the settlement cycle in years.

The move from T+2 to T+1 is not just a minor adjustment but a seismic shift that will halve the time required for trade settlement, and firms that haven’t begun preparing need to step up their efforts now to ensure a smooth transition before the deadline.

Why now and who will be affected by the change?
The decision to move to T+1 settlement is being driven by the need for increased market efficiency, reduced cost, less exposure to counterparty risk and lower margin requirements across the financial marketplace. The move towards faster settlement aligns with the industry’s ongoing efforts to enhance market stability and streamline processes.

Technology will be a key enabler for meeting the demands of the shortened settlement cycle, while coordinating with trusted partners will help firms successfully navigate the challenges posed by the transition.

In fact, the shift from T+2 to T+1 not only cuts the time to settle trades after execution, but it also introduces the requirement for Same Day Affirmation (SDA), meaning that trades executed throughout the trading day must be completed on the same day. This change has several implications, especially for operational teams handling trade processing, who likely will need to adjust their schedules. For alternative investment managers who operate across multiple markets and time zones, there will be less time in T+1 to interact with US-based counterparties. For example, London-based teams will have to match and complete late-day trades made in US markets based on US time to settle the trade and collect cash. Similarly, firms outside the US may need to modify work practices, such as instruction receipt deadlines, to avoid failed trades.

Smaller firms with lighter operational teams and tighter budgets likely will see the greatest impact as the need to adapt quickly to the new settlement cycle will put pressure on limited resources. We are already seeing alternative fund managers outsourcing more work, and T+1 settlement requirements will amplify this need, as service providers are asked to support trade execution & settlement, data management, and reporting.

By outsourcing services and augmenting staff, smaller firms—and larger companies—will be better prepared to meet the new settlement deadlines, especially when relying on service providers that have a global footprint to support regulatory change.

What should alternative investment managers consider ahead of the deadline?

To prepare for the T+1 cycle, alternative investment managers must examine the markets they serve, the types of assets they handle and evaluate their existing operations to identify areas where they rely heavily on manual processes. Leveraging technology to automate these processes will not only reduce the risk of errors but also ensure smoother operations in a world of T+1.

In addition, many operational workflows currently rely on batch processing, which can lead to operational inefficiencies in T+1, as issues may not be addressed until late in the day which reduces the time available to resolve them before deadlines. Moving toward automated processing that can process transactions in near-real time will be crucial to align the T+1 settlement cycle, ensure timely trade confirmations and instructions, and avoid penalties for failures.

The shift to T+1 settlement also poses challenges for firms with global operations spanning different time zones. Ensuring adequate coverage with trusted partners during extended operational hours will be vital to effectively handle trades that occur toward the end of the trading day.

Preparing for T+1 is no longer theoretical as implementation grows closer every day. Alternative investment managers lay the groundwork for success by evaluating their needs and developing relationships with trusted partners who have the technology and processes to ensure they are ready to serve clients when T+1 becomes a reality.

Article originally featured in Global Custodian.