Countdown to T+1 settlement: is your Hedge Fund ready?

11 October 2023 - The $5T¹ global hedge fund sector is set to be impacted by a major rule change being implemented in 2024 that will put increasing pressure on in-house operations teams. The change will cut the time it takes for a trade to be settled from trade date plus two business days (T+2) to just a single day (T+1).

Products affected by the T+1 shortened settlement cycle include equities, corporate and municipal bonds, unit investment trusts, mortgage-backed securities, asset-backed securities, money markets and financial instruments consisting of various security types. The financial services industry - in coordination with regulators - is preparing to shorten the standard settlement cycle in order to reduce costs, increase market efficiency, and reduce settlement risk. Testing for T+1 commenced in August across US and Canadian markets.

Within the hedge fund world, the new shortened settlement cycle means managers’ operations teams must handle allocation and confirmation on trade date, affecting all institutional trades.

With a planned implementation date of the end of May 2024 in the US and Canada, there are now less than 250 days for businesses to get ready for the new settlement cycle rules by making sure their operations teams can cope.

Operational challenges

The reforms pose a number of challenges to in-house operations teams working at hedge funds. Some of the implications are very clear. Shorter timescales means more work for teams, cutting down the amount of time they have to deal with trades. This will of course vary depending on the investment strategy a hedge fund follows, but for those funds trading heavily on a daily basis, it means higher trading volumes and, potentially, more investment into in-house teams to handle increased traffic.

The issue the new deadlines could create for businesses with global operations teams are even more pronounced. Unless they have ‘follow the sun’ operations, T+1 will put additional strains on teams as they try to accommodate the reduced timeframes across different time zones.

While there will be no regulatory penalties in place if deadlines are missed, missing a deadline will trigger semi-automated, or even manual, processes and hinder straight-through-processing (STP). This, in turn, will increase costs and exacerbate any existing inefficiencies in any team’s processes.

Existing processes will therefore need to be reviewed thoroughly by fund managers to make sure their systems can handle the change, with checks on interconnectedness with third parties and scenario planning both needed.

How outsourcing can help

Outsourcing ahead of 2024 could be the solution for many managers in order to avoid falling foul of these incoming regulations next year but, even here, it is important to pick carefully. Any firm will only be as strong as the weakest link in its entire settlement chain, and so asset managers using counterparties need to assess them and make sure they are prepared.

As these rules are introduced, automation will be the key to success. Automating via an outsourced provider can make a huge difference operationally, streamlining many parts of the process to ensure STP levels are maintained.

At the Citco group of companies (Citco), we have invested heavily into our Middle Office Solutions proposition, combining our team’s expertise with leading proprietary technology to provide you with a reliable and efficient middle office service.

Citco’s Trade Matching solution provides Investment Managers with a near-real time feed to all Prime Brokers and Custodians leveraging its instruct system. Citco’s Swift Service Bureau and Standing Settlement Instructions (SSI) repository provides instruction straight to market for settlement, including ingesting all relevant messaging. Meanwhile, full interoperability with Depository Trust and Clearing Corporation Central Trade Manager and ALERT enables T0 matching and allocation at the trade and SSI level across multiple funds. NYFIX for FIX Allocation and matching can also help with higher volumes in the Equity space.

Citco’s highly experienced operational staff are strategically positioned globally to support and handle your activity regardless of the trading region. By leveraging its near-real time, exception based, Trade Matching dashboard and sending an intraday file directly to a client’s Order Manager System, Citco can also communicate with clients as breaks occur.

Finally, Citco’s trade matching solution ensures automation and streamlined matching of trading on T+0, resulting in a decrease in breaks on T+1.

¹As at September 14 2023, according to Statista data https://www.statista.com/statistics/271771/assets-of-the-hedge-funds-worldwide/