As the US market prepares for an industry-wide transition to T+1 settlement, organizations will need to reassess their operational strategy, resilience frameworks, and impact tolerance levels.
The large-scale transition to T+1 is about more than a change in clocks, it offers an opportunity to reevaluate, reinforce, and improve a financial services firm’s operations. Operational resilience is the ability and preparedness of an organization to weather a disruptive change or incident with tolerable impact to clients and business operations. Properly governed, operational resilience structures ensure continuity of critical business operations in the face of a wide range of atypical events such as a cyber-attack, market crash, technology infrastructure outage, or even an industry driven change like the impending move to a T+1 settlement cycle in the US.
The BCI Operational Resilience Report 20231 has highlighted several key metrics on operational resilience as it relates to industry players across different sectors:
- 77 percent of responding organizations have operational resilience plans in development or already in place, and a further 11.5 percent have no current plans but want to consider developing them.
- 87.6 percent of organizations within the banking and finance sector reported that the main drivers for establishing operational resilience programs were regulatory requirements and a wish to align with industry best practices.
- Over 50 percent of respondents indicated not having the headcount and/or staff time to implement realistic resiliency policies.
The 2023 SIFMA Operations conference attendees identified the shortening trade settlement cycle as their top operational priority2. The scale and magnitude of the shift to T+1 makes it imperative for organizations to reassess their operational strategy, resilience frameworks, and impact tolerance levels to ensure that their existing controls’ effectiveness after the transition.
Key risks and complications triggered by T+1
As organizations prepare for T+1 trade settlements, they need to also assess the impacts across a wide range of banking operations. The shortened settlement cycle is expected to introduce a host of challenges and complexities across people, process, technology, and governance aspects of post-trade operations. In the case of an adverse incident, an event where systems, people, or processes fail, there could be detrimental impacts to overall efficiency and effectiveness of post-trade operations, providing an opening for significant reputational and regulatory ramifications.
The rationale behind the migration to T+1 is solid - lower market, credit, and liquidity risks. However, it is worth noting that it also may lead to higher operational, reputational, and legal risks. Market scenarios, such as the current rising interest rates, can dramatically increase the cost and risk centered around funding in the event of settlement fails. The shortened window increases overall risk and potential financial losses for organizations that do not have up-to-date resilience frameworks and SLAs in place ahead of T+1 adoption.
For example, the compressed settlement timeline means that most of the post-trade activities (matching, allocation, affirmation, confirmation, submission) need to be completed by 9:00pm on T+0 (trade date) which could potentially cause cascading issues such as personnel being required to work extended hours, errors due to accelerated processing, settlement failures, etc. An unexpected incident such as a cyber-attack, infrastructure outage or third-party service failure would only further complicate these matters and dramatically affect the firm’s ability to settle on T+1.
A resilient operations structure will not eliminate these issues, but it will help the firm asses what a ‘tolerable impact’ is in this new settlement scenario. It is crucial to determine what disruptive incidents can occur in the shortened trade settlement cycle and prepare contingency and exit plans in line with the firm’s and regulatory risk standards.
T+1 will naturally alter operational plans, and it is important to also understand the impacts to all designs related to infrastructure downtime, RTO/RPO timelines, and business continuity plans in order to mitigate the risks and challenges that lay ahead during T+1 adoption.
How to ensure sustainable operational resilience
Operational resilience is not limited to technology infrastructure. It also includes people, processes and governance aspects of an organization. The transition to T+1 provides a golden opportunity to transform operational resilience by re-evaluating and enhancing enterprise-wide strategies.
Conducting assessments and evaluations across multiple critical business functions and business service enablers will allow firms to identify gaps and potential enhancement areas that were previously missed or are newly impacted.
The goal of resilience transformation is to achieve sustained operational resilience which would not just minimize disruption from industry shifts, such as T+1, but also provide comprehensive protection from future disruptive events and incidents impacting an organization. This can be achieved through pressure testing key business function and other potentially disruptive scenarios while conducting a thorough review of resilience strategies and risk limits.
For example, taking a point in time assessment of your current resilience model and filtering it through the lens of changing settlement cycle would help identify new gaps, or close out existing ones, while driving the conversation around larger risk strategies.
Operations streamline over time, changing with new technologies or when regulation alters the marketplace. Using these opportunities to refocus an organizations operational resilience framework and procedures is key to staying at the cutting edge of industry practices.
As the financial sector evolves and promulgates large scale industry-wide changes, it is crucial for organizations to have robust operational resilience programs in place and to ensure they are adapting in lockstep with the changes.
Industry-wide measures are being taken to reduce risk and improve profitability. These enhancements, however, may prove counter-productive if firms do not fulfil their obligations of establishing and maintaining effective operational resilience programs.
Implementing an effective operational resilience program is a significant undertaking requiring a cultural shift from reactive operational risk management to proactive management of emerging resilience risks. It is critical, not just in terms of protecting clients and ensuring business continuity, but for staying relevant and competitive in a reactive marketplace. Large scale industry changes, such as the transition to T+1, serve as a great opportunity for financial services firms to re-evaluate operational procedures and fail-safes.
1 BCI Operational Resilience Report 2023, https://www.thebci.org/resource/bci-operational-resilience-report-2023.html
2 SIFMA 2023 Operations Conference, Pre-Conference Survey Results, https://www.sifma.org/wp-content/uploads/2023/05/SIFMA-Insights-Pre-Conference-Survey-Results-2023-Operations-Conference-Exhibition.pdf