SmartStream
When exceptions do arise, they will need to be dealt with faster than ever before in order to ensure settlement meets T+1, or even T+0, deadlines. “We are in the world of ‘instant’ now, with near real-time payments, so how do you explain to a customer that it takes five or six days to resolve a problem, when the payment itself is instant?” asks Brandli. “Swift did a survey recently and found that 70% of payments exceptions still take more than five days to resolve, which is crazy. How does that fit in the world of instant?”
“The Bank of England has looked at more real-time settlement and reconciliation, though the UK has done neither that nor CSDR yet,” Brandli explains. “It is sitting right in the middle. It was going to adopt CSDR but opted out on the back of Brexit. The impact of T+1 will only be felt when it comes into play in 2024, so that will cause other jurisdictions to respond.” Ultimately, the US implementation of T+1 will push the global market to follow suit, eventually even moving to T+0 settlement, and the most obvious impact will be on reconciliation. T+1 forces companies to perform reconciliations processing in a compressed time frame, leaving a far smaller window for discrepancies to be identified and fixed.
“The Bank of England has looked at more real- time settlement and reconciliation, though the UK has done neither that nor CSDR yet.”
Are banks ready to reap the benefits of T+1?
Going forward, financial institutions will require systems that enable real-time, intraday processing. That will mean the automation of not only reconciliations, but also exceptions management. As market trends push inexorably towards real time, the speed at which data will need to be processed and matched will be too much for a patchwork of legacy systems that rely on any input from manual processes.
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Increasingly artificial intelligence (AI) is the only practical option to achieve the data-matching speed that is required. SmartStream has implemented AI in its cloud-native reconciliations platform, which is currently the fastest AI data quality application on the market, yet behaves like a consumer app, so requires no training or IT skillset to use. With the right level of automation and the appropriate use of AI-enabled solutions, banks are in a position to reap many benefits from T+1. US regulators see great potential for cost savings, reduced market risk and lower margin payments. The DTCC’s risk model simulations have shown that the volatility component of the National Securities Clearing Corporation’s margin could potentially be reduced by 41% by moving to T+1. Furthermore, T+1 could simply boost the volume of trading.
“If you are in the T+1 world – or faster – it becomes more attractive for people to invest in shares, bonds or other securities,” adds Brandli. “It minimises the risk in their investments. The retail banking work has transformed to a world of ‘instant’ services, and if you run a trading platform you want to sell instantly as prices move. T+1 won’t solve that but gets banks to gear up to run processes more quickly. Those who do it better will win.” According to the Citi survey, the industry feels it is well placed to meet the T+1 deadline, but it accepts there will be bumps in the road. When CSDR was implemented in Europe in 2022, settlement failures spiked and penalties accrued. A similar scenario may well happen with T+1 before the market adapts. So, banks are not fully prepared for T+1, not only because of other priorities such as ISO 20022, but also fragmented systems infrastructure. Undoubtedly, automation is the answer, particularly because T+1 is probably just a precursor to T+0, when processing speeds will be far too great for human beings to handle. “There are a lot of buzzwords around in the market – cash and liquidity management, corporate actions and more – but first of all it is all about settlement,” says Brandli. “Get that right first and everything else should follow. It is possible, but it is a question of how much risk you are willing to take. If a bank gets it wrong, it will take a hit.” ●
Future Banking /
www.nsbanking.com
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