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More clarity on T+1 transition in the UK, firms must act now

The UK Accelerated Settlement Task Force Technical Group (TGT) has published a consultation paper with guidance to support the UK transition to a T+1 settlement cycle by end of 2027. The report makes 57 draft recommendations for industry participants and regulatory bodies which are essential for a smooth and timely transition.

Whilst there are two alternative scenarios for the UK T+1 transition – a coordinated transition with the EU and Switzerland or an independent UK transition – the recommendations are tailored to a UK only transition.

This document provides a perspective on the TGT report, and is relevant for Executives (CFOs, COOs, CROs, Chief Control Officers etc); Heads of Planning, Transformation, Strategy and Compliance; Board Members of all firms subject to T+2 settlement under current UK CSDR rules.

At a glance
 

  • Automation is at the heart of the T+1 transition in the UK. UK industry participants have an opportunity to define strategic infrastructure and process changes to implement many of these operational requirements to position themselves for a successful transition. As we learned from the US transition in May 2024, relying on manual resourcing and tactical workarounds is not sustainable.
  • T+1 transition is a massive, multi-year effort. It will require industry participants to assess and address changes across multiple functions, systems, and teams, as well as educate and engage clients early. This report is a significant step forward in facilitating the T+1 transition in the UK, guiding industry participants on what they should focus on immediately. Regardless of whether the transition between the UK, EU, and Switzerland is coordinated, firms now have enough clarity and guidelines to initiate the transition.
  • Don’t wait, start now. Industry participants should incorporate the insights from these draft recommendations into their 2025 planning and conduct the necessary analysis to drive synergies with parallel programmes. Ensuring the right level of investment and resourcing is available is key to facilitating a smooth transition. Establishing robust governance and a roadmap for the changes can also provide the right structure and plan to manage the transition effectively.
  • Key actions for industry participants. The report underlines several preconditions to successful implementation, or “Principal” recommendations, which include:

    • Settlement Processes: implement performance monitoring metrics, bilaterally update client contracts and policies and procedures, and automate where applicable in line with the industry recommendations.
    • Static Data: standardise and automate the sharing and authentication of Standing Settlement Instructions (SSIs) and Know Your Customer (KYC) information (for trades not eligible for CCP clearing).
    • Corporate Actions: UK trading venues will need to mandate standardised dividend procedures and Electronic Election Entitlement for listed issuers and automate corporate action processing.
    • Securities Financing: implement confidentiality policies for pre-sale notifications, automate stock lending recalls, and align the recall deadline with UK regulated venue closures.
    • FX: promote Continuous Linked Settlement (CLS), and review FX liquidity provision post-US T+1 implementation, to mitigate FX settlement risk.
    • Client Outreach and Legal Documentation: review existing contractual arrangements and outreach as applicable to review and inform stakeholders.
    • Financial Market Infrastructure (FMIs): FMIs are urged to review their systems, reconcile rulebooks, and adjust impact tolerances for T+1 readiness.
       
  • Additional recommendations. TGT has also outlined recommendations aimed at improving efficiency in UK capital markets, but which are not deemed preconditions to UK transition. They include perspectives on after hours trading, mutual funds’ settlement cycle, Legal Entity Identifier (LEI) issuance and adoption, processes related to digital identity, onboarding, and KYC, and including critical service providers to FMIs within operational resilience regulatory frameworks. While industry participants should prioritise the principal changes above, it will be beneficial for them to also stay tuned to how these additional recommendations develop.
  • Next steps. Industry participants have the chance to share feedback on the clarity, completeness, and feasibility of the recommendations through the consultation process, which is open until 31 October 2024. The final report, due in December 2024, is expected to provide more detail on the implementation timeline between 2025-2027. Additionally, ESMA is expected to publish a report by January 2025 with details on the EU transition.
  • Path forward. Moving to an accelerated T+1 settlement cycle is a material change from the T+2 transition, with meaningful operational, cost, and risk considerations. The time to start the UK T+1 journey is now.

Key topics for the UK transition
 

The TGT report contains recommendations which cover critical post-trade activities that firms must be able to implement effectively for a successful UK transition. We have outlined key topics relevant to the UK transition in the table below and pulled in some observations from the US transition in May 2024. While market structures differ, UK (and EU / CH), in hopefully short order) industry participants must be prepared to leverage the US experience to successfully implement T+1.

How industry participants can start to take action
 

The US experience has shown that the T+1 transformation programme is large and complex. Firms should begin preparing for the transition by taking some essential steps:

1) Establish a governance structure to oversee T+1 transition, including senior business and functions representatives, and obtain headcount commitment from management to plan and deliver.
2) Conduct analysis to identify challenges in the existing settlement cycle and changes required for T+1 implementation.
3) Kick off impact assessments of the teams, processes, and systems affected and the magnitude of change. This should also consider potential interdependencies and overlaps with other programmes (both from a strategic design / change and a resourcing perspective).
4) Develop a roadmap for implementing T+1 requirements given that sufficient detail of required changes is now available. The roadmap can be finetuned when the final TGT report is published in December 2024.
5) Develop budgets and allocate funding and resources. Securing budget to begin scoping and implementing necessary process and infrastructure changes is crucial to enable a successful transition.

A successful transition will not only require resolution of internal process and technology gaps, but also alignment externally with multiple vendors, CCPs, exchanges, and market cut-offs. This reinforces the need to streamline settlement processes and operating model well ahead of the mandated timeline. We hope to see alignment between the EU/CH and UK timelines to minimise any unnecessary costs and complications.

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Footnotes:

1 Industry hit by ‘significant funding gaps’ after switch to T+1, Citi says