T+1 Trade Settlement Has Led Top Wall Street Firms To Adopt New Technology

Published : 2 months ago, on 08/08/2024

When U.S. Securities and Exchange Commission (SEC) agreed to rule amendments on February 15, 2023, the most notable change involved shortening the standard cycle for broker-dealer transactions from a “T+2” standard to a “T+1” window. While there are exceptions, the update applies to most transactions.

The T+1 rule went into effect on May 28, 2024, prompting top Wall Street firms to adopt new tech to enable compliance.

SEC leadership hopes the updates will help promote market reliability and efficiency within financial markets. They designed the changes in response to pain points that became glaringly evident during events like the GameStop/Robinhood saga of 2021.

Saphyre is the leading pre- and post-trade platform being adopted by the world’s largest financial institutions to make T+1 possible. Saphyre Co-Founder and President Stephen Roche provided insights into the T+1 trade settlement and its implications for top Wall Street firms.

What T+1 Means

The term “T+1 settlement” refers to a financial transaction settlement cycle where organizations must finalize and settle the trade from the trade date (T) plus one business day.

If you execute a trade on Monday, the settlement of that trade — meaning the transfer of the security from the seller to the buyer and the payment from the buyer to the seller — must be completed by the end of Tuesday.

Why Is T+1 Settlement Important?

Shortening the settlement cycle by just one day may not seem like a significant change. However, it can have major implications for both parties and the market as a whole.

Most notably, the T+1 change reduces the risk of one party defaulting before the trade is completed. Additionally, the update means that securities and funds are available sooner for reinvestment. This enhances market liquidity and can lead to better efficiency.

The shift to T+1 represents a broader regulatory push to modernize financial markets. The SEC wants to protect investors and accelerate transaction speed.

The Challenges of Adapting to T+1

The switch to a trade plus a one-day settlement period has been bumpy, with several hurdles standing out.

Manual Process Inefficiency

Most businesses relied on manual processes to settle transactions under the T+2 model, and some are clinging to these outdated processes. Roche broke down the efficiency issue as follows: “As in most things in the world, if you buy something today, you expect to have it the same day, not two days later (T+2).”

Roche pointed out that the short-term answer for many firms involves having more people in multiple time zones to help with the settlement process.

He provided the following example: “If you’re in APAC and you have shares in the U.S. markets for Facebook that need settling and issues occur, you literally have five hours or less to get it done in the early morning hours.”

However, this approach is simply compounding the inefficiency of manual processes, driving up operational costs and creating additional points of failure. Businesses need to simplify and automate, not implement more staff.

Disparity in Processes and Nomenclature 

Financial institutions often have unique processes and nomenclature. These variations complicate the standardization needed for a seamless T+1 settlement. Roche broke down the implications of different processes and nomenclature using a simple analogy.

“Think of the process of putting your clothes on, and I said one of the steps is to put your shoes on. Firm ABC may put a pair of dress shoes (nomenclature) on but has the process of tying laces into a ribbon (5-steps). While firm XYZ has a pair of loafers (nomenclature) that they just slip on (1-step),” said Roche.

The disparity in processes and nomenclature makes manually settling transactions in T+1 unsustainable.

How Technology Makes T+1 Possible 

Technology holds the key to making T+1 and, ultimately, T+0 possible. Solutions like Saphyre help top Wall Street firms overcome the aforementioned barriers in several ways.

Automating Pre-Trade and Post-Trade Processes

One of the key features of Saphyre is automation. It streamlines pre- and post-trade processes, thereby mitigating the risk of human error. Firms that adopt Saphyre can become leaner and more nimble in their processes.

Mapping Data in the Cloud

Saphyre’s team has seen these changes coming for years and has taken a proactive approach. Roche said, “For the last seven years, we have started mapping data in pre-trade during the setup of a new fund before a trade ever occurs. Doing this eliminates up to 75% of the post-trade settlement issues.”

Data mapping provides better transparency and simplifies transactions. Businesses will achieve and maintain better security visibility, thereby expediting trades.

Translating Processes to Counterparties

The mapping process allows businesses to maintain their unique language and nomenclature without sacrificing collaboration. Saphyre translates each entity’s language for counterparties, ensuring that both entities are on the same page regarding transaction details, payment, and other particulars.

Accelerating the Flow of Information 

Saphyre also specializes in post-trade services, which expedite processing and manage trade exceptions in real-time. By maintaining accurate data in the cloud, the platform minimizes the need for manual interventions and callbacks, ensuring swift resolution of issues such as standing settlement instructions (SSIs).

What’s Next for Wall Street?

Looking ahead, AI and other advancing technologies promise even faster settlement cycles. Saphyre envisions a future where T+0 settlements become the norm. Roche said, “Today, we are allowing firms to work in a T+0 fashion in their operations, especially when the settlement process needs to occur within five hours or less.”

The SEC’s T+1 settlement rule marked a pivotal shift toward more efficient and reliable financial markets. Pioneers like Saphyre have provided the cutting-edge technology to make this shift to the future sustainable for the long term.