Murray Bender: RBC Investor Services presents insights on the challenges and opportunities confronting corporate and institutional investors. Today, we’re pleased to present the second in our series of podcasts on the transition to a T+1 settlement cycle, which is planned for Canada, the United States, and Mexico in May of 2024.
Back with us to continue the T+1 discussion is Mario Brizar, Director of Business Development at RBC Investor Services. Welcome, Mario.
Mario Brizar: Thanks, Murray. Pleased to be here.
Murray Bender: Mario, in our first podcast, we talked about some of the basics around T+1. Today, why don’t we switch gears somewhat and delve into the practical aspects of T+1. I know that you’ve been talking to asset managers and other market players a lot lately. Based on these conversations, what are some of the things that managers can be doing right now to prepare for T+1?
Mario Brizar: After talking to many of our clients, collecting data from over 260 managers as part of our Asset & Wealth Manager Survey and participating in a number of industry events and conferences, we’ve come up with a practical guide for T+1.
In our view, the first step is to track your trades. Leverage your custodian data to really visualize your current state, then overlay your current state activities with the T+1 matching and affirmation cutoff times that are coming down the line. And be careful with the timing nuances between different markets.
What you want to be doing is looking to quantify the impact of a do-nothing scenario. In other words, how many trades would be at risk if no changes were made to your processes today?
Murray Bender: Okay. So managers have identified trades that are at risk in a T+1 scenario. What’s next?
Mario Brizar: Once you have an understanding of the potential impacts, you can focus your efforts on the bottlenecks in your process today. We suggest adopting a build, buy, or partner mindset.
So for example, some clients are working with their custodians to better utilize their online portals rather than instructing their trades over email. This will improve STP. Some clients are buying or subscribing to off-the-shelf technology like CTM to strengthen areas of their existing model, while other clients are part of this growing trend and they’re really looking to continue to outsource middle- and back-office functions to trusted partners.
From the Asset & Wealth Manager Survey, we saw that a lot of managers are really focused on keeping their front-office functions in house, and then they can look to utilize the strength of a custodian to look at middle and outsource functions.
Murray Bender: What about foreign exchange?
Mario Brizar: Best to take it one market at a time. Once you’re confident with the model in supporting your Canadian trades, you can start to unpack the trades that require an FX leg. This can be automated with standing instructions.
Further optimization can also be achieved by looking at automating your current currency hedging processes. And in cases where you deal with multiple custodians, there could be value in netting and centralizing your FX execution with one desk.
Ultimately, these FX optimization tools really look to simplify the process, cut costs and streamline reporting.
Murray Bender: How can the various market utilities make life easier for managers when it comes to T+1?
Mario Brizar: Yeah. Market utilities are really important because they play a role in automating the entire process with very little intervention required from managers. Unilateral systems like SWIFT, CTM for matching, or ALERT for SSI management help to improve the communication across market participants, which is especially important with a shortening settlement cycle. Some managers are even leveraging independent third parties to evaluate the competitiveness of their FX execution, for example.
When it comes to connectivity itself, managers will need to look at the licenses they have in place to subscribe to market utilities, or they can leverage a custodian’s existing connectivity.
Murray Bender: Now we’re hearing that other markets such as the UK and Australia will ultimately be moving to T+1. Should managers be taking this into consideration now?
Mario Brizar: Definitely. In my opinion, this is a really important aspect of the entire process. In our first podcast, we touched on the T+1 markets in scope to May 2024 and the phased approach that we’re seeing across jurisdictions, with different markets dropping into the T+1 regime at different times.
As other markets move to T+1, you want to make sure you have broad time zone coverage. In most cases, having a global follow-the-sun operating model will be key in the future.
Murray Bender: And it sounds like we won’t be stopping at T+1.
Mario Brizar: Atomic settlement is the desired end state and regulators have made that clear.
Some clients are looking to improve their models by addressing specific modules at a time, making considered investments to ultimately support instantaneous settlement in the future.
The goal here is to really have as much work done on T as possible.
Murray Bender: So managers have implemented various changes to accommodate T+1. What’s next?
Mario Brizar: Yeah. After they’ve implemented these changes, addressed their bottlenecks, accessed market utilities, or automated where possible, we really encourage clients to stress test their models in early ‘24 and document everything. As your operational teams come up for air after the busy year-end period, take some time to fine tune your trade settlement SLA with your custodian ahead of the conversion weekend.
Murray Bender: What about the period right around the May, June implementation time frame? Any suggestions on how managers can prepare for this very critical point in time?
Mario Brizar: Mm-hmm. So while automation is going to be a key factor of a successful model, we’re hearing that a number of managers are planning to extend their hours of operation in May and June just to ensure everything runs smoothly. Some clients are looking to bolster their own operational teams and others are leaning on custodians to increase capacity and coverage during this time.
In the end, the custodian can and should act like an extension of the client’s operational team. Proper oversight and near real-time reporting will really help teams focus and triage exceptions and trades at risk.
Murray Bender: Thanks, Mario. This is really a very practical list. So what I’m hearing from you is that managers really need to be moving very quickly on T+1 right now.
Mario Brizar: Yeah. Don’t wait for spring, so to speak.
Murray Bender: Indeed.
We’ll be continuing our discussion on T+1 in the weeks and months ahead. In the meantime, for insights on a range of topics relevant to corporate and institutional investors, including our previous podcasts, visit rbcis.com/insights. I’m Murray Bender. Thanks for listening.
This content is provided for general information and does not constitute financial, tax, legal, or accounting advice and should not be relied upon in that regard. Neither RBC Investor Services nor its affiliates accepts any liability for loss or damage arising from use of the information in this podcast.