DTCC urges affirmation focus ahead of T+1 move

On May 28, large numbers of securities transacted across the North American marketplace will be required to settle one day after they are executed. The Depository Trust and Clearing Corporation (DTCC) is urging all market participants to scrutinize their existing technology and operational procedures, especially those around the affirmation process, in preparation for the Securities and Exchange Commission’s (SEC’s) deadline.

Much has been discussed and written about the technology and operational adjustments firms trading in the US capital markets need to make to ensure they comply with the SEC’s soon-to-be implemented rule, which effectively reduces settlement cycles for large numbers of broker-dealer-executed trades, from two days after execution (T+2) to one day (T+1) or next-day settlement. Naturally, every firm has a slightly different approach to ensuring readiness, based on its existing technology stack, its overall levels of sophistication and the capabilities of its IT and operations teams. As the deadline draws nearer, firms across the board continue to assess, interpret, update and test their systems to ensure they comply with the new regulation with minimum disruption.

T+1 road map

The SEC’s final T+1 rules include new requirements around same-day affirmation practices for broker-dealers, to help ensure timely settlement within the compressed time frame. The requirement for broker-dealers is that they take certain actions to ensure 100% of all trades are affirmed as soon as technologically practicable, and no later than the end of trade date. This was further reinforced by the Financial Industry Regulatory Authority in a recent notice.

Based on the current T+2 settlement cycle, approximately 75% of trades are affirmed by 9:00pm ET on trade date, according to DTCC’s latest analysis, dated March 2024. DTCC continues to provide monthly updates on the industry’s affirmation progress.

Val Wotton, managing director and general manager of institutional trade processing at DTCC, explains that many firms subject to the new rules have made good progress with respect to their readiness for the crossover. “Generally, most [firms] are in a good place when we look at overall testing that has already happened, not only within the institutional trade processing world, but also down to the National Securities Clearing Corporation and the Depository Trust Company [DTC],” he explains. “There is really good coverage of testing across all demographics—we’ve looked at it in terms of total volumes and the total values firms are processing—and, from an overall readiness perspective, the industry is in a good place. However, there are certain pockets of affirmation inefficiency remaining, which need to be addressed.”

Already available

The good news for firms under the SEC’s purview is that automated solutions for straight-through post-trade processing have already been available for a number of years. They are well understood and have been tried and tested—they simply need to be embraced and adopted. According to Wotton, it is important firms understand the trade affirmation process in the US, especially European and Asia-based firms where the process has traditionally been more manually intensive than their North American counterparts. In the US, affirmation essentially kicks off the post-trade process, and it must happen before trades can progress to settlement at the DTC. During this process, each party agrees to the trade’s confirmation details as sent by the broker-dealer. 

“Outside of the US, the affirmation process has come to the surface with the move to T+1,” he explains. “Other markets work on a presettlement or pre-matching basis. The whole block allocation process happens across the globe, and it’s a very consistent model. Those firms that have a good understanding of the affirmation process are well prepared and are familiar with the challenges, but those firms—especially non-US firms and those investment managers [IMs] that do not have a global footprint—will need to implement changes to support the US affirmation process and achieve T+1.”
 

From an overall readiness perspective, the industry is in a good place. However, there are certain pockets of affirmation inefficiency remaining, which need to be addressed.

Val Wotton, DTCC

Feeling the pinch

Clearly, regional financial services firms of modest size that do not have a physical presence in the North American market, even though they trade across it, are likely to feel the pinch when it comes to automating and streamlining their affirmation processes. The question then, for those IMs and their custodian providers, is what will their approach be to ensure they have the correct procedures in place to support efficient and accurate affirmations?

Wotton sees some challenges that need to be addressed, not least those pertaining to differing time zones for firms located outside of the North American capital markets, although he is quick to add they are not insurmountable. “If the block allocation process is performed efficiently, the trade will be affirmed by the custodian. But, if there’s an issue with the affirmation process and the custodian needs to follow up with the IM, that might only be picked up the following morning due to the time differences,” he says. “Firms are starting to understand that there are increased costs associated with failed or delayed trades and they’re looking at that overall return on investment.”

The way forward

Overall, Wotton is cautiously optimistic about where the industry is right now and what firms need to focus on to ensure they have their houses in order come the end of May: “Get your block allocations right so everything can be settled, which then puts the custodian in the best possible position to affirm transactions,” he advises, adding that IMs should consult their custodians sooner rather than later about their expectations and the processes around their cutoffs and how they are going to work in practice.

“This is not solely about testing,” he says. “It’s also about the fact that post-trade processes can be performed efficiently today and ensuring that they are fully in place when we move to a T+1 environment at the end of May.”

Adopting an advanced automated operating model—either by enhancing existing systems or relying on available third-party solutions—is pivotal to T+1 success.  

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