Lessons learned from U.S. T+1 implementation: Start early, prioritise wisely.

Prioritization strategy: Focus on critical points of failure

We approached T+1 implementation with a clear methodology: identifying which weaknesses had the highest impact on trade settlement success. Our analysis revealed that most trade failures throughout the industry and within our company were due to settlement instruction issues, making this our top priority.

We identified the most important elements as trade execution, trade allocation, and settlement instructions automation. By prioritising these three areas, we were addressing the root cause of most of our settlement failures.

Our approach classified improvement opportunities into two categories:

1. Must-have: Critical processes requiring immediate automation (trade execution, allocation, SSIs and a matching platform).
2. Can wait: Improvements that could be implemented later (system integration in trade management, and accounting systems, a more automated reconciliation system, an overview of stock lending options, and corporate actions.

This strategic prioritisation allowed us to allocate budget efficiently, focusing first on the changes that would have the greatest impact on reducing trade failures.

Key implementation decisions and their rationale

When automating our settlement instructions, we faced a critical choice: continue using an internal model where we would be responsible for maintaining SSIs or shift to a model in which the global custodian becomes the owner and maintainer of the settlement instruction data, and we own and maintain our accounts and account-specific data. We chose this model for several important reasons:

1. Risk transfer: With the internal model, my team was responsible for timely SSI updates, often depending on information from custodians or brokers that might arrive late. The global custodian model transfers this responsibility to custodians, who, as the book of records, have the most current information.
2. Single source of truth: We gave our brokers access to the same SSI platform used by our custodians. This created a unified environment where my team, our custodians, and our brokers all accessed identical, up-to-date settlement instructions.
3. Eliminating manual processes: Before automation, we were sending settlement instructions via Excel spreadsheets, creating significant risk for errors and delays that couldn’t be sustained in a T+1 environment.
4. Central matching: A matching platform provided seamless connectivity from trade execution to settlement. We used the platform in conjunction with an SSIs global database which supported the input, maintenance, and retrieval of account information. This meant we could automatically enrich trades with SSIs, ensuring the accuracy of account information.

For our foreign exchange processes, we identified that FX transactions presented further risk, creating another potential point of failure. Rather than building internal solutions, we partnered with a third-party provider to automate FX processing. We decided to leverage specialised expertise rather than diverting internal resources to develop capabilities outside our core strengths.

We also identified system integration between our trade management system, accounting system, and matching platforms as an improvement area. However, our analysis showed this represented a lower risk for manual entries on our side. This allowed us to defer these integrations to a later phase, making the budget more manageable while still addressing the most critical risks.

Results

After implementation, our trade failures due to settlement instructions went from being our primary problem to essentially zero, not even 1%. Now, if we have a trade fail, it’s mostly due to security lending issues, not SSIs.

Allowing our brokers direct access to the same platform where custodians maintain SSIs leaves little room for discrepancies. As I put it, “There is no way that my brokers are going to have the wrong SSIs because they’re utilizing the same platform that the custodian is updating.”

By addressing the most critical elements first, we dramatically improved our settlement performance without requiring an excessive initial budget. This phased approach allowed us to spread costs over time while still meeting the T+1 timeline.

Four critical areas to address now.

Based on my experience, firms preparing for shorter settlement cycles should focus on these areas in order of risk to trade settlement:

1. Standing Settlement Instructions (SSIs): Implement a global database where custodians maintain SSIs as the book of record, eliminating manual processes that cause most failures. Consider the global custodian model to transfer responsibility to custodians who have the most current information.
2. Trade execution, allocation, and affirmation: Automate these processes using central matching platforms to ensure trades are verified immediately. For us, this meant using DTCC’s CTM platform, where trades automatically match with the broker, as well as the DTCC’s Settlement Instruction Manager platform that sends instructions to third parties (custodians).
3. Foreign exchange (FX): Review FX processes, especially for emerging markets where requirements are stricter, and consider third-party automation solutions rather than building internal capabilities.
4. Securities lending: Implement efficient recall processes with automation to minimise settlement failures when securities are on loan.

Personnel considerations

Budget isn’t the only resource constraint during implementation. You need to allocate not just the budget but personnel as well. You need to plan for these scenarios in advance.

We also discovered communication challenges when dealing with counterparties who had outsourced their back-office operations. In one case, it took three weeks just for a major broker to identify which team handled trade affirmations. These coordination issues become even more critical with compressed timelines, especially when dealing with time zone differences in global markets.

Why the EU present greater challenges

While U.S. firms dealt with a single depository (DTCC), European markets face a much more complex landscape with multiple exchanges and depositories. This fragmentation significantly increases the complexity and risk of settlement failures.

We encountered specific challenges even with our U.S. implementation that highlighted how much more complex Europe would be. For example, we had securities that could settle in both ICSDs, but we preferred one over the other. Our system was allowing broker instructions to override our preferences, causing failures. We had to implement specific rules to ensure securities settled at our preferred depository.

Adding to this complexity, European regulations impose CSDR penalties for failed trades – essentially doubling the financial impact compared to the U.S. market. If your trade fails in Europe, you face both penalties for trade failure and CSDR charges. The impact is twice as significant, making early preparation even more essential.

The bottom line: Start now.

The clearest lesson from my experience is simple: don’t delay. It doesn’t cost anything to analyse your processes as soon as possible. The sooner you start analysing your processes, the better prepared you’ll be – not just operationally but in terms of budget planning and personnel allocation.

For firms preparing for UK and EU T+1, this advice is even more urgent. With greater complexity and potential penalties, the cost of being unprepared is substantially higher. By starting the analysis now, firms can develop a measured, prioritised approach that addresses critical settlement risks first without requiring excessive immediate investment.

The main goal was T+1. The question becomes how to achieve it and improve the process within your budget constraints. The lesson is: do not postpone it. Work with the budget you have but first get a clear picture of what you need to do, then prioritise.