On the 18th January 2023, DTCC released its latest guidance on T+1 – Testing approach, a detailed 51 page document going through each system and process impacted within DTCC (UST1.org | link to testing approach).
Testing a business in advance of a reduction in the settlement cycle is a vital step in ensuring that the transition is smooth and successful. A reduced settlement cycle, which refers to the time it takes for a trade to be settled, can have significant benefits for capital markets, but it will come with its own set of challenges. By testing your business in advance, financial institutions and other market participants can identify and address any potential issues before the change is implemented – which is currently set at 31st March 2024 according to the proposed SEC rule amendment (link) with likely postponement to 3rd September 2024.
Moving to T+1
One of the main benefits of testing for the move to T+1 is the ability to identify and address any systems or infrastructure issues. A reduced settlement cycle means that trades will need to be processed and settled much faster than before, which can put a strain on existing legacy systems. Financial institutions will need to determine if their systems are capable of handling the increased volume and speed of trades, and if not, make the necessary upgrades needed to overcome their challenges. In discussion with our clients over the past 18 months, our ongoing advice is that impact assessment undertaken early can mitigate operational risk driven by this change and can help identify opportunity for optimising front-to-back processes. Client engagements we’ve been a part of have been leveraging the move to T+1 to address legacy issues within their business such as golden sourcing of SSI/ref data systems, optimal utilisation of systems and vendors already embedded in their business, change programs across middle and back office. Upgrading systems and infrastructure, as well as dealing with increased operational risks, can be costly, and it’s important for financial institutions to understand these costs before making the change. This will enable firms to determine if the benefits related to internal builds or changes facilitating full / automated compliance with reduced settlement cycle outweigh the costs and make informed decisions accordingly.
Testing a business in advance of the move to T+1 can also help identify and address any operational risks. A reduced settlement cycle means that there will be less time for financial institutions to identify and address any issues that may arise during the trade processing and settlement process. Financial institutions can identify and address any operational risks, such as communication breakdowns or errors in trade processing before the change is implemented. Testing also allows financial institutions validate the benefits of the changes being implemented – such as compliance and increased efficiency.
Why Testing Considerations Matter
On the week commencing the 16th of January we saw the release of the DTCC Detailed Testing Framework, which outlines key element of support which will be offered to the industry to execute advance testing for the move to a reduced settlement lifecycle. Some of the most critical areas for consideration ahead of a move to T+1 are:
- New test environment connectivity and new system alignment will be a required milestone in being ready to test for T+1, with testing aimed to start on 13th November 2023
- Counterparty performance management and industry orchestration for testing with counterparties will be an invaluable source of readiness for the T+1 migration, DTCC’s CTM and TradeSuite processes and result testing benefit from coordination and outreach between multiple market participants
- Firms should look to define their roadmap for T+1 impact assessment and testing as early as possible to ensure industry alignment and time to make the required changes to their business remains once the setup and connectivity have been completed
- There is the opportunity to test for double settlement day scenarios which is in a sense “stress testing” firms’ operating model and systems – which is something that will greatly benefit not just a move to T+1, but also overall operational efficiency and straight through processing (STP)
- Prime Broker and Custodian testing for buy-side firms will be pivotal on their management of this migration.
- Ensuring testing scope considerations are complete across the multiple categories and scenarios addressed in this Detailed Testing Framework (link to testing approach) – there are multiple facets to the T+1 initiative which should be considered in future-proofing firms for upcoming changes to their business such as asset class, product, and regional expansion
Tailored and timely testing of the impact of a reduced settlement cycle is a critical step in ensuring that the transition is successful. It allows all market participants to identify and address any potential issues and understand the costs associated with implementing a reduced settlement cycle. By taking the time to thoroughly test your systems and processes, financial institutions can ensure that the move to T+1 is implemented smoothly and successfully. At Quorsus, we’re leveraging our deep industry knowledge to ensure we’re best placed to support our clients in overcoming the challenges they face as the industry gets ready to move to T+1.