A business case for automating the middle office ahead of the move to T+1

The industry has been on tenterhooks waiting for the US Securities and Exchange Commission (SEC) to announce the date for T+1 implementation in the US. In February, the long-awaited day arrived as an SEC communiqué confirmed the go-live date for the shortened settlement cycle as 28 May 2024. 

There’s been mixed reaction in the industry to the news. In recent months, many firms have lobbied against the SEC’s initially suggested date of 31 March, arguing that a more appropriate target would have been September 2024. This later date would also have facilitated the move for Canada, which needs to move in lockstep with the US.  

There’s no doubt there will have been a lot of raised eyebrows at the confirmed date, and likely a few panicked expressions from those who have yet to begin their preparations. This announcement will be a catalyst for any firms still lagging, with now only just over a year to go until implementation. 

Recent research conducted by Torstone found that 81% of brokers and banks active within the US and Canadian markets are either using some level of manual processes or home-grown systems to support their post-trade processes. 

This is a huge concern for firms still early on in their preparation journey. Manual processes and batch processing are simply not compatible with the shift to a shorter settlement cycle – firms need to update and automate their middle- and back-office systems or face substantial operational risk. 

We’ve seen first-hand the disruption that can be caused by delays in post-trade processing, and the consequences can be significant. It’s important that firms start planning and implementing solutions immediately to ensure a smooth transition to the new settlement cycle. 

So, what should firms do? We think that planning and implementation should revolve around one key tenet: automation. For smaller and midsize firms especially, failure to modernise and automate their processes will cause significant strain on resources and decrease the feasibility of meeting the newly announced deadline. Automation provides some key benefits: 

• Coping with market changes without increasing the number of operations staff: T+1 is not the end goal, given recent output from the SEC discussing T+0. This means that firms will be compelled to invest in automation sooner or later, even if they don’t do so immediately. With operations staff already in short supply, and the impact of the Great Resignation over the last couple of years, there are very few staff available to deal with post-trade processes that support the full spectrum of assets a client may wish to trade. 

• Focusing operations staff on more value additive, client-facing tasks: Improving resilience and process efficiency is becoming of paramount importance. Foundational to this effort is exception-based processing, coupled with reducing the number of manual tasks that can be easily automated and centralised across the full spectrum of asset classes. By doing this, staff can be redeployed to focus on tasks related to improving client service and supporting new product development efforts. 
• Dealing with higher volumes of electronic order flow and market volatility: The post-2008 crisis reform agenda led to the migration of many over-the-counter (OTC) instruments onto trading venues and clearing houses, resulting in an increase in the volume of data that post-trade teams must handle on a daily basis. Additionally, the rise in market volatility over the last few years has put considerable pressure on manual processes.  
• Providing greater operational resilience: In the post-2020 industry, the focus is on creating a more resilient architecture, and one key benefit of middle-office automation is the reduction of operational risk. Firms cannot afford to attract negative attention due to operational failures. 
• Modernising in line with the era of cloud: The industry has been making a collective effort to modernise legacy systems in the middle and back office, while also shifting towards a cloud-hosted environment. The pace of cloud migration has accelerated in the post-pandemic environment as firms aim to make access to critical systems easier and more secure. Additionally, cloud environments offer better scalability compared to on-premises deployments. 

These combined benefits of increased automation make a clear business case for firms who are lagging in their preparation for T+1. It is also important to remember amidst all the preparation and planning, that the move to T+1 itself is a positive step forward for the industry and will undoubtedly help to increase operational efficiencies and reduce risk.