How T+1 Will Impact the Buy Side

In just 5 minutes, we’ll explore the world of post-trade financial services by way of new ideas, insight snippets, emerging trends, and thought-provoking questions. In this episode, Sean McEntee, DTCC Executive Director, Institutional Trade Processing Project Management, talks about the impact that T+1 will have on the buy side and what they can do to prepare.

Episode Details:
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Transcript

Intro: From DTCC, you're listening to Take 5, the bite-sized post-trade financial services podcast that tackles an industry topic or trend in just 5 minutes. Tune in to hear a DTCC executive share their perspective on how to grow, prosper, and protect the global financial markets. There's a lot to uncover in five, so let's start the clock.
 
Sean McEntee: Hi, it's Sean McEntee, I lead the Matching and Agreements business for DTCC Institutional Trade processing, also known as ITP. As you might imagine, given our role in the industry, I'm spending a lot of my time these days talking to our clients about the impacts of the shortened settlement cycle, the move to T+1 and specifically how ITP can help with that. As part of those conversations, I'm asked all the time about how T+3 to T+2, which happened in 2017, differs from T+2 to T+1 this time around. From my perspective, there are two very distinct differences, particularly as it relates to the buy side. My favorite T+1 quote that I've heard or read is that: "In the move to T+2 we lost a day in the settlement cycle, but in the move from T+2 to T+1 we lose the only day in the settlement cycle." So, where we currently have a full business day to clean up exceptions, that effectively gets reduced down to a 5-hour window between U.S. market close at 4:00 PM and the new DTC affirmation cut off which is 9:00 PM Eastern. That window for exception handling is drastically reduced and that's going to put significant pressure on both the buy side and the sell side to handle any exceptions that might occur in that shortened window. 

The other very important difference that I want to talk about is the impact on the buy side. People that I've spoken to largely view that move from T+3 to T+2 as somewhat of a non-event with little impact on the buy side. We think that shortening to T+1 will have a significantly greater impact on the buy side for two reasons. In addition to the core piece of the regulation that reduces the settlement cycle to T+1, there are two additional components of this regulation that will impact the buy side either directly or indirectly. The first is this new—and I apologize for getting technical and lawyerly—but the new Exchange Act 15c6-2 which basically mandates same day affirmation. While that is technically a sell side regulation, it states that brokers will need to have policies and procedures in place to ensure that their clients are affirming trades, as soon as technologically practicable and no later than the end of trade date. The second regulation—again very relevant to the buy side and this is a direct impact to the buy side—is the Advisors Act 204-2 which outlines record keeping requirements for registered investment advisors or RIA's. This regulation requires RIA's, that are parties to contracts under 15c6-2, to make and keep records of confirmations received, allocations and affirmations sent, each with a date and time stamp. This is a new piece of regulation that we think will significantly impact buy side. I'll come back to the 204-2 requirement either in this podcast or if we don't have time maybe we'll come back to that specifically with a follow up one. 

Let me talk first about the 15c6-2 and affirmations. It's a sell side regulation, but it will have significant impact on the buy side. Our largest sell side clients are already talking to ITP about leveraging our ITP Data Analytics tools to monitor client’s affirmation rates and their compliance teams are in the midst of drafting policies and procedures for the requirement; or for the regulation that speaks to things like warning letters when clients drop below a certain affirmation percentage and even potential penalties. So really to be determined how this all plays out. I can tell you for certain that the broker compliance teams are taking this regulation very seriously and will need to look hard at who they're trading with and how those parties are complying. 

How does this impact the buy side? Well, today many buy side clients have outsourced that affirmation process to their custodians. ITP is advocating that with this new regulation, the best practice for the buy side is really to take back that responsibility as the affirming party. We’ve introduced the workflow in CTM known as Match to Instruct or M2i for short., that makes it really very easy for existing buy side clients and existing CTM clients on the buy side to do just that. So, what does M2i do? Match to Instruct streamlines what is currently a multi-step process of allocation matching in the middle office and then confirmation affirmation in the back office. We consolidate that down into a single process where the matching CTM between the IM's allocation and the EB's confirmation is the affirmation of the trade. When that trade is affirmed, it flows directly down from CTM to the DTC and is staged for authorization and settlement. If all of that happens prior to that 9:00 PM cut off, then it'll flow in a matter of seconds again from CTM straight down to DTC. So, a very efficient workflow. 

We have seen tremendous uptake again with T+1 as a tailwind of this workflow in the past year to the point where we're now approaching nearly 100 buy side clients live and those buy side clients are experiencing affirmation rates again prior to 9:00 PM, the new cut off, of 98.6%. Contrasting the affirmation rates in the CTM Match to Instruct model versus the legacy confirm Affirm model, we're seeing 98.6% prior to 9:00 PM. We're still seeing affirmation rates in the mid 40's by 9:00 PM for that confirm affirm model. So, there's a huge gap that would need to be closed for clients that choose to continue to have the custodian affirm on their behalf. We really just think that Match to Instruct is a much more efficient model and really a light lift for the buy side and something you should really consider. 

So hopefully I've shared some information today that's helpful to you as you prepare for this T+1 transition. If you want more information on the CTM Match to Instruct workflow, please reach out to your relationship manager or salesperson or you can always find more on dtcc.com. Thanks.

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