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Highlights
- Major global markets have shifted to the T+1 settlement regimen for securities settlement with the UK planning to complete the transition by 11 Oct 2027.
- Asset management firms in the UK will be affected by the shift which will necessitate changes to their operating models and technology processes.
- Asset management firms must comply with the provisions of the UK T+1 Code of Conduct (UK-TCC) and modify systems and processes across people, process, and technology to achieve a smooth transition.
Introduction
Over the last couple of decades, the securities settlement cycle has undergone significant transformation globally driven by the need to better manage risk and enhance operational and capital efficiency.
Many major markets have transitioned to the T+1 settlement cycle and the number of jurisdictions considering the shift is steadily rising. The UK is the latest to join the bandwagon—the UK Accelerated Settlement Taskforce (AST) published the final implementation plan for the transition to T+1 on 11 Oct 2027. The AST has recommended that the UK Central Securities Depositories Regulation (UK CSDR) be amended to accommodate T+1. In addition, the plan includes a UK T+1 Code of Conduct (UK-TCC) for market participants, a clearly defined scope, critical and recommended actions, and behavioural commitments with focus on automation and ‘action this day’ or immediate actions, which are critical to successful transition to T+1.
The shift to T+1 will impact asset managers in the UK with the transition mandating modifications to their operating models in areas such as trade funding, post trade processing, and trade life cycle events. Asset managers may have to modify their technology processes to ensure compliance and smooth transition.
Why T+1?
Shortening the settlement cycle offers market participants several operational benefits including cost and efficiency optimisation, reduced settlement fails, and the agility to respond swiftly to market events as well as lower collateral and margin requirements.
Most importantly, a move to T+1 enables alignment with jurisdictions that have already shifted to T+1, mitigating the cost and impact of misalignment. Other benefits include:
- Reduction in counterparty risk by minimising exposure of buy- and sell-side firms during the interval between the execution and settlement of trades.
- Increased liquidity as cash will be tied up for lesser time allowing firms to deploy cash quickly and more effectively.
- Reduced operational costs due to increase in automation which in turn will help reduce reconciliation breaks and the costs associated with managing those breaks.
However, a shift to T+1 comes with a few challenges as well:
- Risk of inaccurate identification of transactions eligible for T+1 will arise due to the AST exempting certain securities from T+1. This means firms need to carefully evaluate transactions and classify them correctly to determine if they are eligible for T+1. An error leading to incorrect classification can result in settlement issues and fines.
- Cross border securities transactions pose challenges as the settlement window will be shorter than earlier. Also, these transactions involve a complex chain of processes and intermediaries which can potentially increase the possibility of settlement breaks.
- Increased margin and collateral requirements as lenders of securities will demand higher margins and collateral to manage the increased risk arising from the shortened settlement cycle. This may mean firms need to make pre-funding arrangements to ensure smooth settlement which will make daily cash management processes more complex with regard to timely communication with all parties involved.
Evaluating the impact
A move to T+1 will impact several market participants (see Figure 1) as well as the scope of asset classes.
Figure 1: Impact of T+1 on market participants
Figure 1: Impact of T+1 on market participants
The UK’s T+1 implementation will cover transferable securities traded on UK trading venues and settled at UK Central Securities Depositories (CSDs). This means that all securities, including stocks, bonds, and other transferable instruments, traded on platforms like the London Stock Exchange and settled through UK CSDs like CREST will be subject to the T+1 (see Table 1).
In-scope |
Out of scope |
|
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Table 1: Securities under the purview of T+1
The move to T+1 will significantly impact post-trade processing operations of asset managers including interactions with brokers and other counterparties.
The trade allocation and confirmation as well as matching processes should be completed in real time or near real time—no later than 23:59 UK time on T+0. For electronic trade confirmations, real time or near real time matching processes are already in place using services from Depositories Trust & Clearing Corporation (DTCC) and MarketAccess (TRAX). However, a shift to the T+1 regime will make it imperative for market participants to ensure allocation and matching are done on T+0. Operational processes need to be modified to ensure breaks are handled promptly. Breaks in trade matching and confirmation must be resolved in a shorter window which will require firms to ensure their static data is accurate. Additionally, asset managers must take advantage of emerging technologies such as artificial intelligence (AI) for automated resolution of breaks in trade matching. Middle office systems such as Broadridge NYFIX, Bloomberg AIM, Genesis Trade Allocation Manager may need changes. However, individual firms will need to assess impact based on their own application landscape.
All settlement instructions should be submitted to the CSD no later than 5.59 UK time on T+1. Breaks arising out of incorrect and/or missing Standard Settlement Instructions (SSI) must be handled prior to the start of T+1, which means that SSI must be updated in real-time. Additionally, firms must improve SSI data quality checks at the source to avoid breaks. Firms must integrate internal SSI management systems or alerts provided by external providers such as the Depository Trust & Clearing Corporation (DTCC ALERT) with their trade capture system to ensure the SSIs are in place while processing the trade.
All FMI providers, including their third-party providers and SWIFT must review and update existing policies, processes, systems, and interfaces to accommodate T+1. Buy-side firms may need to upgrade their FMI interfaces to adhere to T+1.
The AST recommends adherence to the prevailing industry standard cut off time and return deadlines for stock lending recalls. This will require the recall time to be shortened for securities settled in the T+1 regime. While SFTs are exempted from T+1, the securities lending and borrowing process will be impacted—recall notification time needs to be shortened to T+0 to enable borrowers to return securities prior to T+1 settlement. Asset managers must automate lending recall processes either through inhouse changes or third-party vendor services. Lenders of securities will also demand higher collateral to cover the potential increase in the margin call.
Service level agreements (SLAs) in bilateral contracts with counterparties and other third parties must be updated to align with T+1 for in-scope assets. Asset managers will need to review all existing contracts and update as required.
For efficient T+1 settlement process, guidelines related with Place of Settlement (PSET) and Place of Safekeeping (PSAF) for brokers, custodians, and buy-side firms will need changes. This means asset managers may need to modify their systems and processes to adhere with the new guidelines on PSET and PSAF.
Changes may be required to the standardised dividend process to adhere with T+1 may necessitate changes to the claims policies, processes, and systems managing corporate action claims. However, the impact on buy-side firms from a claims management perspective is expected to be limited. They may need to review the claims management process and policies and partially change systems.
The way forward
Asset managers dealing in UK securities must ensure full compliance with the UK-TCC recommendations.
Let us examine the actions that they must initiate across people, process, and technology for a smooth transition to T+1.
People
- Set up governance frameworks to measure and verify compliance and regularly review the T+1 compliance committee’s actions.
- Ensure adequate budget is acquired and team is formed to define solutions.
- Train new and existing employees on the implications of T+1.
Process
- Review internal processes to identify impacted areas.
- Set up governance frameworks to track readiness.
- Review and plan for potential modifications to the regular audit process to ensure compliance with T+1.
- Review and plan for updates to post-trade operations, procedures, operating manuals, relevant SLAs and so on.
Technology
The UK-TCC recommends increased automation of systems across SSIs, corporate actions, and stock lending recalls.
- Create backlog of system changes and create a project implementation plan that covers all business functions.
- Focus on automation:
- SSI integration: Leverage market solutions such as DTCC ALERT for managing SSIs and integrate them with trade processing flows. We recommend adding SSI at trade capture to ensure early validation.
- Stock lending: Adopt industry standard messages for securities recall process. This will mandate changes to the existing system to improve efficiency and reduce risk of settlement failures.
- Automated testing: Adopt automated testing to thoroughly test all necessary changes to adhere with the Oct 2027 deadline.
Asset managers must build a cross functional team to assess the impact of T+1 settlement on people, process, and technology. This team should be tasked with establishing governance systems and planning for the complex front-to-back changes needed for a seamless transition. We recommend that firms start the process in 2025 to ensure completion by end 2026.
In conclusion, the transition to T+1 represents a significant step towards enhancing the efficiency and security of financial transactions in the UK. It will promote a more resilient and competitive financial market, ultimately benefiting investors and the broader economy.
The successful adoption of T+1 will mark a pivotal moment in the evolution of the UK’s financial infrastructure, paving the way for future innovations and improvements. And sooner asset managers start planning for the transition, the better equipped they will be to meet the Oct 2027 deadline.
