Preparing for T+1 – Have You Considered All of the Challenges?

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Christy: Hello, everyone, and welcome to today's webinar, "Preparing for T+1: Have You Considered All of the Challenges?" My name is Christy DeMaio Ziegler, and I will be your moderator.

Joining us today are Marshall Saffer and Sudhir Segu. Marshall is a strategic and operational business leader with demonstrated success in launching, growing, and managing software and services companies. For the past 25 years, Marshall has provided solutions to many of the largest PE funds, hedge funds, and traditional asset managers, bringing a deep understanding of operations and a strong technical background. Sudhir is a seasoned professional with over 20 years of extensive experience in the hedge fund industry. His experience spans across various facets of the financial sector, including end-to-end life cycle management, encompassing trade capture, confirmation, collateral and cash management, settlements, reconciliation, and reference data management. Sudhir acts as a trusted business partner for CSC's largest hedge fund clients. His strategic insights and operational prowess have been instrumental in optimizing processes and driving sustainable growth for them.

And with that, let's welcome Marshall and Sudhir.

Marshall: Hello. Thank you for that introduction.

Sudhir: Hello.

Christy: Of course.

Marshall: So we appreciate everybody taking the time today. What we want to discuss is the transition from T+2 to T+1. The hope is that most of you listening have already either gone down the path, are in the process, are testing, or at least have considered what's going to have to take place before May 27th of this coming year when the transition happens. What we're finding is, with talking to our clients, is that everybody seems to be in some state of, what's the best word, of transition, right? I don't think anybody's 100% there yet. But when we're talking to people, there are certain things that need to be considered that we're finding and we wanted to bring up during this discussion and at least bring them to bear so we can have an intelligent conversation and maybe add some value to how you're thinking about moving from T+2 to T+1, right?

So essentially, moving from T+1 means that all the processes and technology support for settling equities, corporate bonds, ETFs, ADRs, swaps, options, right, must be transformed to accomplish all the relevant tasks from what used to be T+2 to essentially trade date, right? All told, we anticipate that about more than 80% of the activity that most hedge funds and asset managers are doing on T+1 will now have to be transferred to T+0 to meet the regulatory requirements.

So things that we want to talk about today, we want to talk about post-trade activities being compressed into shorter time frames. We're going to talk a little bit about technology infrastructure and systems that we think people should be looking at or at least thinking about, some of the operational challenges with the compression, some of the impact on complex asset classes and trades, and a lot around security lending, security settlement, collateral management, and margin. I think these are kind of the high-level areas that we're going to cover and we think that need to be addressed before May 27th.

Sudhir, is there anything else you want to add, add that I missed here?

Sudhir: No, Marshall. I think pretty much you have covered it. I think while we progress, we are going to talk more deeper into all these aspects.

Marshall: Okay. In terms of what we've been thinking about, and this slide is entitled "Trading complex assets under T+1," I think it's more all the components that are associated with the problem of moving from T+2 to T+1. I'm going to hand it over to Sudhir. Sudhir, why don't you walk through some of the components and we give some more detail about what we think some of the core or the more important aspects are and some of the key processes we think are important that need to be looked at or outsourced or addressed over the course of the next few months to actually make the mandate?

Sudhir: Surely, Marshall. I think the key elements are right there on your screen. I want to pick each one at the time, each bucket, starting with I would say that I think on the operational front, that's going to be the key process which needs to be touched upon, because why am I saying that, because this is where you're going to have to undergo a lot of changes cutting across the process lines. I'm talking about the whole trade life cycle itself. There is going to be changes to be made on the trade confirmation perspective, reconciliation perspective, on the settlement perspective.

These are both post- and pre-trade activities, which need to be addressed. And to do that, I would say that the component, which we spoke a little while earlier, that's going to be a key differentiator is going to be the technology infrastructure. That needs to be adopted in the cases where funds are probably doing it manually at the moment, or I would say they're process dependent or person dependent. Or in some cases, they will probably have to fine-tune the existing technology framework. They have to revisit it.

While I do talk about that, I do understand that everybody is going to be talking about, yes, there is going to be a considerable investment which needs to go into looking at the whole technology prospects. It could be through the vendors. It could be an in-house one. It could be through the vendors. But I would say that the money, which is going to be spent, I would say the onetime investment, that's going to offset the fees and the costs, which are going to be due, due to the inefficiencies if we are not going to be looking at the process carefully, because as Marshall was mentioning in the beginning, the whole process is going to cut down by 80%, and that's a very, very short window.

While I say that, the other aspect to that I would say that on the reconciliation front, that process has to be looked at very carefully. At the moment, most of the funds largely across the globe are looking at the T+1 reconciliations while that is going to be still relevant. But I would say that intraday reconciliation and T+0 reconciliations would become that much more critical from the best practices perspective and also to meet the short time window, which we have now.

For that, I would say that the same-day allocations and confirmation process also is coupled with that. That becomes a key element, and if any changes happen in that, our intraday reconciliation is going to catch that part.

Marshall: Sudhir, can I jump in for a second?

Sudhir: Yes, please.

Marshall: Let me just jump in real quick because I think we should highlight I think the impacts for what we're finding, right, and I think we can put it into buckets. So if we look at the allocations, the affirmations, the trade matching, the settlement, corporate actions, and security lending and margin, I think those are the primary buckets that are going to be impacted greatly.

If you look at some of the time cutoffs, as you said, right, the allocations, right, it's being recommended now if you are looking at T+2, right, it usually is 9:30 a.m. on the day after the trade. That's what it is today, right? Tomorrow it's going to be 7:00 p.m., the day of the trade for the allocations, right? Affirmations are 11:30 a.m. day after the trade, and then it's going to be 9:00 p.m. day of the trade. And trade matching is also 11:30 a.m. to 9:00 p.m. day of trade. And then settlement, obviously, is two days to one day. And corporate actions are same day, where it used to be T+1.

So I think you're 100% correct that, from an operational and system standpoint, this is going to a huge impact. But I'm going to hand it back over to you.

Sudhir: Absolutely, yes. And to add on to that, I think I would say that automated feeds is going to be in need or process reengineering would be needed to do that. Why am I saying that? Because then the firms would be able to move from a workflow-based model to an exception-based model. What it does, it's all automated. The people dependencies goes away. People are looking only at the exceptions. They need to key in very few elements there, data points.

Having said that, I would also say that real-time booking is also needed, and that's going to be possible through your automated feeds, either through your OMS systems, and that's going to cut across different regions and zones. That needs to be very tightly coupled.

And I think on the operational support, I would say that since the deadlines have to be met, okay, firms will closely have to look at the follow-the-sun model. Why am I saying that? Because now the person who is sitting probably in the U.S., once the market opens, he will probably have to spend about 14 to 15 hours sitting on the desk to ensure that the trade is going through. Whereas if you look at the follow-the-sun model, okay, there you're actually handing it over to another team. It could be a co-sourcer, it could be a vendor, or it could be an extended team in a different region altogether. But that's going to completely change the whole framework, and it's going to add more operational value to that.

Marshall: What I'm hearing, though, is it's potentially more than just operational changes, right? Cost structure is going to change, right . . .

Sudhir: Absolutely.

Marshall: . . . having additional staff. Not to say what with the movement to T+1 and potential fail rates and the potential costs of failed trades might have an impact on the performance of a fund, right? Is that fair to say that you also see that as well, don't you?

Sudhir: Very much, very much. And moving on, I think the other element I would say the liquidity management, that becomes a very key component too because funds have to manage the liquidity numbers very, very closely. And why do I say that? Because they need to have good insight in terms of how the cash balances are sitting, and that is only possible through a real-time view into their cash balances.

Cutting across entities, cutting across the currencies, they need to account for the money which is in the flux too. When I say the one in the flux, I'm talking about the encumbered cash. What do I mean by that? The encumbered cash would be anything which is there in the settlement period. That also needs to be accounted for because that's already been spent. At the same time, even on the collateral front, the collateral is moving. Even that money needs to be accounted for, both incoming and outgoing. At the same time, your expenses needs to be carefully monitored too, and that could be cutting across your monthly runs, your quarterly runs, your annual runs. Again, that depends upon the appetite which the firm have.

Marshall: So then, in that case, what you're saying is that firms either need to operate with a larger cash cushion, right . . .

Sudhir: Yes.

Marshall: . . . or with a greater liquidity profile in T+1. Or they might even have to have lines of credit associated with the trading activities, that they can draw down if need be, because if they get to a crunch, right, those are the only two ways I think that you could probably manage that.

There's also the components I'm hearing about is you have to fund potentially your FX trades upfront, right?

Sudhir: Yes.

Marshall: So when you're doing your FX trades associated with this, there's additional cash burden on actually having to fund those, where before you at least had some time frame to you might be able to settle up later on.

Sudhir: Absolutely. Absolutely, because the time window is going to be cut short. I'm going to subsequently cover in the other buckets too there. While you did speak about that, I would say that some of the firms are also looking at establishing a good dry powder for themselves, having a sufficient amount parked with the counterparties so that (a) they reduce the number of collateral calls, and they have money which is available for them to use in terms of any fails which they expect to come through.

Marshall: Interesting.

Sudhir: Other aspect I would also say that the liquidity ratios have to be closely watched. Why do I say that? Because sometimes the firms have large cash balances sitting, and that will attract negative interest rates in some of the regions. So one needs to look at how do we park them either in Treasuries or in money market funds, which is pretty much very liquid in nature, and whenever the funds is needed, that's readily available with those.

Marshall: Okay.

Sudhir: I would say that moving forward I think on the risk management perspective, I would say that a robust framework is needed again here. That is to assess your counterparty risk, your market risk, your operational risk. Okay, and to avoid this, I would say that a real-time view is needed into the breaks, okay, and the resolution of the breaks. That is where your reconciliation becomes key. Like I spoke about earlier, the intraday reconciliations, that coupled with T+1 reconciliation is going to be a very key element for us to avoid penalties because if we are not watching our fails management and the breaks in real time, and if we are not addressing them, we could be looking at penalties in terms of DTCC applying that if you're not affirming the trades also in real time.

This would also mean, I would say to accomplish this, one has to look at closely aligned with the street entities, from the fails management perspective and the managing exceptions. So they need to have a closely-knitted network available there, a real-time accessibility to their contacts there.

Moving further along, I would say I think on the repos also many of the firms do have large number of repos on their books.

Marshall: Sure.

Sudhir: They need to closely watch that because they need to close out in time so that the securities are available with them to avoid any fails in the market when they have to deliver something.

Having said that, I think that also on the counterparty risk limits and the tolerances, that also becomes very, very key to be monitored because if we miss out anything there, that could have repercussions on the funds' performance as such.

Marshall: So hopefully they've already contacted their counterparties at this point and renegotiated any terms associated within the SLAs and made sure, from a testing standpoint, that the counterparty systems are all up to speed as well. We can only hope though.

Sudhir: Yes. And I hope that I think they're working closely with the counterparties in their specific regions because that's when they'll have real-time access to them.

Marshall: That's very true, especially from a recon standpoint, right, because what we're finding is that most prime broker systems or the counterparty systems have different cutoffs, depending on what system they're on in what part of the world. That's a very valid point.

Sudhir: Yeah. I just want to touch a little bit on the regulatory compliance perspective also. With the shorter window, a tighter framework is needed, especially I think in the case of rehypothecation, where the firms will have to closely monitor regulatory limits and be in compliance.

An example for that I would say some of the firms we have seen that they need to closely look at their commission schedules because if any changes happen and if they are not monitoring that number closely, they could have their commissions off balance. They could have cash being spent I would say in certain cases extra. So they need to closely monitor that, and also at the same time they also need to look at various reference data points because that becomes key.

I think that lastly I would want to touch upon the collateral management because that's going to be the very, very key element here. Why do I say that? Because you could expect many collateral calls coming through with a shorter window.

Marshall: Right.

Sudhir: So firms need to have sufficient cash parked at counterparties, which we spoke earlier, to avoid frequent calls. One can say that counterparty risk will also be reduced. I would say that . . .

Marshall: Hopefully, right? Hopefully counterparty risk with all this is getting reduced.

Sudhir: Yes. Historically, we have seen, even from the regulations perspective, funds are adopting the client margin agreements in place. By doing so, they're actually parking the large amount of cash, which is predominantly on your initial margin perspective that is sitting with a third-party entity. So that way a lot of counterparty risk is reduced there.

Marshall: Right.

Sudhir: Alternatively, I would say that the funds can also look to move centrally cleared deals. They can look at rather than going through the bilateral ones, they look at the CCP worlds. By doing that, they're actually achieving the collateral compression across the book because there are various elements which is involved there, and that will reduce their collateral requirements.

I would say lastly funds can also look at the relationships where they have multiple relationships with the same entity. It could be Citi acting as a prime broker. It could be acting as your FCM. It could be acting as your centrally cleared counterparty. Why am I saying that? They can take advantage with the cross-product margining, wherein they are able to compress the margin, which is cutting across all the different assets.

Marshall: Well, it's not only assets. It also could be in a multi-manager situation, the netting effect in a multi-manager of trading the same, one going long and one going short and having to net and go to the street, right? That's going to…

Sudhir: Absolutely.

Marshall: They've had some time to work through that. That's going to be an interesting problem in terms of how do they deal with that in almost real time.

Sudhir: Yes. Yeah, I think having said that, probably we can move to the next slide, which actually gives you insights.

Marshall: So this is a visual of the time frame in terms of your follow-the-sun model. Why don't you just walk through it one more time for them?

Sudhir: Surely. So what's happening is the time frames is actually cutting down. On the allocation front, the time is actually reducing by about 16 hours, whereas on the affirmation side it's about 14 hours, and on the sec lending side 18 hours is cut down. So you have a very, very, very short window to act upon.

Marshall: And isn't Asia being reduced almost to a two-hour processing time.

Sudhir: Yes.

Marshall: As I read different things for different . . . right, it's like the window for Asia specifically is two hours.

Sudhir: Yes.

Marshall: Wow. That that's a big change okay. Okay.

Sudhir: It is.

Marshall: I'm going to go to the next slide for us then. And then I think we wanted to talk a little bit more about collateral management.

Sudhir: Yes. I think largely we had spoken in the earlier slides. This is more of a filler for everyone that they need to look at the optimizations and the strategies, which we have already spoken a little while earlier. They need to look at the automated collateral management systems. There are plenty of them which is available in the market. And at the same time, I'm going to subsequently talk about that in the next slides, they need to have streamlined processes to achieve all that they have to do.

Marshall: But, Sudhir, for this recon and collateral management and some of these other functions, right, there is an outsourcing option, right? If people have not put everything in place today, right, and they've got to make May 27th, there are ways that they could work with a provider, like ourselves, potentially to take on certain roles or functions as they build out the process or as they decide how they want to handle this move to T+1. Isn't that correct?

Sudhir: Absolutely, Marshall, because we have seen that that model works pretty well. Many of our client partners, they do call us co-sourcers and not outsourcers because we truly become an extension of their operational framework, wherein we are front ending even the street entities.

Marshall: Right. Okay. I'm going to move on to the next slide, which really is just dealing with liquidity management and short-term funding. You covered a lot of this, didn't you?

Sudhir: I did.

Marshall: Right. But as you said, I think there are systems in place that can be utilized to help this, and I think the most important piece, as you said, is how do you get that comprehensive view in the morning of your unencumbered and encumbered cash to make proper decisions, right, and how . . .

Sudhir: Yes.

Marshall: It's not going . . . It's definitely not a manual process of doing this in Excel and having somebody go to banking portals and pull information down, right? In this environment, you definitely have to systematize it. Would you agree?

Sudhir: Absolutely, because if you're talking about 10 or 20 relationships out there in the street, you have to go into each of those statements and get the numbers. What is the solution for that? You look at the automated tools which is available there, and that is where vendors like us or the partners like us come in handy because we have tools in place to help you address that solution.

Marshall: Well, I also think that this is part of the problem. Like active treasury management can actually be an alpha-generating exercise if done correctly, right?

Sudhir: Yes.

Marshall: Rather than being reactionary, if you've got your cash, what your future cash needs, what the expenses are associated with the future cash, and you really put a process around this, I think treasury can be a form of alpha, rather than just an operational burden. But that's my that's my two cents. What do you think?

Sudhir: Absolutely. Absolutely spot on there.

Marshall: Okay. I think then we're just going to move to, going to go to the technology. You wanted to talk about some of the systems, Sudhir, that you're seeing people implement and what are out there.

Sudhir: Yes.

Marshall: I think we should name names. Tell them what we're seeing from our 400 clients about what they're using.

Sudhir: Surely. I think on the trade capture perspective, I would say that people need to adapt or embrace OMS, if they're not doing so already, because (a) you are able to see the deals on the screen itself. Everything is available there. They can execute it. There is direct feeds, which is available in a lot of the PMS. And you can define the intervals at which it has to refresh.

I would say that a direct connect is needed with the middle office and trading desks too. As I was speaking earlier, that has to become real time. There are many platforms which is available. There is FXGO on the FX side. There are Bloomberg VCONs. A lot of them is available which funds can utilize.

Marshall: What are we using, Sudhir? In our internal operations for our fund administration outsourcing business, which platform are we using?

Sudhir: Well, we have an in-house system called TranHub, which actually takes the feeds from everybody. It could be a batch process, it could be a real-time process, or it could be the end of the day process. We have feeds, we have connectors to Bloomberg and Reuters, from where it's going to pick the data. It's going to run the trades there. It's going to run the corporate actions and the pricing.

Marshall: Okay. Okay, great.

Sudhir: The other element is I think the post-trade processing systems. That is where e-confirmation comes in handy. I would say that on the equity and the fixed income front, a lot of firms and funds use Omgeo CTM, which is actually coupled with Alert. And we do have a license of our own through which we can work through. All we need is your BIC code, and you're ready to go. We will look at the whole exception queue. You will have a dashboard to look at how the numbers are moving, how many breaks are there, how are they getting cleared. At the same time, when I spoke about Alert, it actually ensures that your settlement instructions are also matched on the same day at the same time.

On the OTC world, I would say that firms have adopted something called Market Trade Manager, which again has changed the workflows into the exception-based model because it is connected to your MTM, it is connected to your DTCC, and also it caters to your paper confirms. So it's a one-stop shop solution.

On the F&O front, I would say Traiana is being used widely across the firms. I know that on the sale side, Traiana is used very often there. So the sale side knows very well about the functionalities of that.

On the FX deals perspective, I would say that intraday reconciliations, which I spoke earlier, that becomes key, and there are prime brokers who are able to give you reports at a very frequent basis.

I do want to hop on to the other one, which is your reference data one. I would say that I'm going to actually link it with your SSIs, which I spoke a little bit earlier. That becomes key. You need to ensure that your SSIs are regularly being monitored, and if any updates are there, that's being done. This is to avoid any failures which is going to come through. Again, as I said, there is a short window, so we really don't want the money to be missing somewhere and considerable efforts going into getting it back.

I would say that you also need to review and update your tolerance and limits. Commission schedules needs to be closely monitored as and when there are changes. That needs to be updated. The channels have to be there to look at the fails management with the counterparties.

Having said that, I think from the risk management perspective, I would say that one has to closely look at if they can utilize the various tools which is available in the market. They can look at the different analysis just to see that what would be their collateral requirements on a T day or T+1. They can look at stress testing models. They can develop it in-house, or they can look at the vendors who are available out there. Third-party, which I spoke earlier, that becomes key. Funds needs to regularly look at the credit ratings of the counterparties. That way they're ensuring that the counterparty risk is also being mitigated.

I would say one large aspect, which we have used and it is working very well, phenomenally well across our firms, is what we look at is something called scorecards for the counterparties or for the street entities. What is that? We are actually pitting how each firm is doing against the other one. There are various parameters on which we actually rate or evaluate them. That is your timely responsiveness, your file availabilities, and aged break, how much time they're taking to resolve them, how responsive they are on that front too, whether they have extensive coverages in terms of data points, whether the statements are delivered on time every day, whether the margin calls are delivered on time every day, because again, as I mentioned, the shorter window means that we are going to be cutting across there. And then again recurring, systematic, and operational breaks needs to be looked at.

Last, largely since we coming very close to it, I just want to touch upon the collateral management system there. Like we spoke earlier, you need to have an automated system in place, wherein you are actually able to compare the counterparty data. You have a bird's-eye view, I would say sort of a dashboard where you're actually able to see: What is your collateral calls going to be on that particular day? What is your PMS reflecting versus what is your counterparty reflecting? You're able to gauge the differences there. If you see larger differences there, you need to drill down. At the position levels, see that which position is actually causing that and fix that. Why do I say that?

Marshall: Yeah. That could be a whole separate webinar if we wanted to talk about collateral management in the systems moving process.

Sudhir: Absolutely.