Could T-Zero Trading Be A Possibility?

As asset managers push for T+1 trade settlement, any approach not grounded in new technology will fail.

Gabino Roche is the CEO of Saphyre, a pre-trade client onboarding platform utilized by JP Morgan, BlackRock, Northern Trust, Franklin Templeton and more.

As asset managers push for T+1 trade settlement, any approach not grounded in new technology will fail.

The financial services industry has a long standing practice for settling trades called T+2. Very simply, “T” stands for the date of a trade, and two indicates 48 hours (two days) after the trade, which is the time period it takes to settle the accounts between the parties and complete the transaction. There is a lot of settlement work that happens behind the scenes to settle a trade in that window. However, the primary reason why, in the digital age, it still takes two days to settle a transaction is because there are parts of the financial industry that are still working in a very manual, antiquated process.

Within that process is what’s called pre-trade. This takes place whenever there are account maintenance events or typically a new client is onboarded and includes customs such as know-your-customer (KYC) and the checks that are in place to prevent money laundering by a client. There’s also the collection of a client’s tax forms, setting up the terms agreements, and then of course, there are the operational setups internally that every investment firm needs to handle. After that, you have the electronic platforms where trading occurs like Tradeweb, and FXall, etc.

What this means is that investment managers deal with all of this data around accounts that sit with a custodian bank, with a broker dealer, and other parties. The mapping of all this information, for the most part, is done via a messy combination of email, fax, and spreadsheets–that’s just the initial account set up. If any information changes after the first time you open up an account, that's when things can really fall through the cracks and lead to longer settlement times. If the account opening or maintenance information is incorrect, that may not be discovered until post-trade.

The firms are paying for account maintenance activities twice–in both pre-trade and post-trade because of a manual copy-and-paste, which makes it more error prone. Because of issues with having T+2 taking 48 hours to settle trades, things get lost in translation, we're not as efficient, we can't have our book of records up to date.

Technology Can Get Us to True T+1 or Even T Zero

There is now a new push within the industry to shift from a T+2 framework to T+1; basically a 24-hour timeframe to settle transactions. As someone who has worked within financial institutions for their whole career, I can tell you all that's going to happen is firms are going to try to crunch the same amount of work into a 24 hour period instead of 48 hours with no innovation. Mistakes will happen and somehow miracles will make it appear on paper that everything has been solved, but in reality costly mistakes will be masked. This means institutions and clients will have repercussions and errors that may not be detected until later.

This is why the pre-trade and post-trade processes are due for a digital overhaul. Rather than emails, spreadsheets and faxes, software and AI can be used to remember all these data and document points for the five functions–Ops, KYC, Legal Tax, Onboarding and their relationships to the different parties. Data memory is the thing that's been missing in the finance industry and is rife with errors due to the manual data transfer. Everyone talks about standards but maybe we should be talking about memory.

But everyone has been talking about standards for decades in the financial industry, and the standards never get adopted. In reality, every one of these institutions has their own legacy system. There's duct tape behind some of these banks to connect all these systems to translate the information and keep everything running smoothly, unbeknownst to you, the customer or to these different investment managers and hedge funds. Conducting all of this across email, fax and spreadsheet means they can be intercepted. If you put it on a secure, interoperable platform, then you can enable the democratization of that data to actually seamlessly integrate and map to all those legacy internal systems from the 1980's and 90's mainframes. If you create memory with mapping of data, you enable interoperability between digital platforms, and then the question of adopting standards is no longer important. That’s why technology holds the key to taking us to a T+1 or even a T Zero world.

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