DTCC Report Lays Out T+1 Best Practice

A new report from post-trade infrastructure provider DTCC submits that trade confirmation and affirmation in US securities markets needs to be brought forward more than 12 hours to meet the requirements of the impending shift to T+1 settlement. Notably, however, the recommended cut-off time for trades to be completed is 7pm EST, which is outside of the current CLS window for FX settlement, and will remain so, even if CLS extends its window as is being discussed currently, to 7pm EST, meaning some FX trades will inevitably become T+0.

The report, Hitting 90% Affirmation by 9:00 OM ET on Trade Date: The Key to T+1 Success, does exactly what it says on the cover, encourages market participants to automate their post-trade operations to have adequate time to allocate, confirm and affirm at least 90% of their transactions by 9:00 PM ET on trade date, something DTCC says is a critical step for firms and the industry in achieving a successful transition.

DTCC says under the current T+2 timeline, approximately 90% of all trades are affirmed by 11:30 AM ET on T+1, the current affirmation cut-off. To maintain existing levels of settlement efficiency, it says the industry should affirm at least 90% of all trades by the 9:00 pm ET cut-off on trade date, and for this to occur, trade allocations should be completed by 7:00 pm ET on trade date, leaving two hours for the confirmation and affirmation process to take place.

Stressing the importance of collaboration in achieving a successful transition, DTCC says that in December 2023, 69% of all trades were affirmed by 9:00 PM ET on trade date.

As noted, however, even if trades are fully allocated by 7pm ET, challenges will remain for those firms seeking to hedge FX exposures, as the CLS window currently closes at midnight Central European Time, or 6pm ET. The likelihood is that funds will either execute more regularly with their custodian, or run their operations teams to the new US cut-off, ahead of what is hoped to be a more complete solution or process to maintain minimal settlement or funding risk.

The good news is that the FX trades are largely predicated upon accurate data from the underlying securities positions, thus, if the DTCC guidelines are effective and implemented, at least firms will have a better handle on what exactly they have to do in the FX market.