5 Key Considerations for T+1 Settlement from an Investment Accounting Perspective

On February 15, 2023, the Securities and Exchange Commission (SEC) adopted rule amendments to shorten the standard settlement cycle for most broker-dealer transactions from two business days after the trade date (“T+2”) to one business day after the trade date (“T+1”). With transition set to take effect on May 28, 2024, the move has sparked much discussion and debate across the financial services industry around the impact of a shortened settlement cycle across front, middle and back-office investment management operations.

This week, we look at the T+1 ruling from an investment accounting perspective and have identified five key considerations on how T+1 Settlement impacts the investment accounting process and how modern technologies can evolve the relationship between front-office operations and back-office functions for the better. 

1. Moving from Batch Processes to Real-Time Accounting

One most obvious impact of T+1 is the tightening of time available to send trade information to back-office accounting teams. 

Many legacy investment accounting systems are still batch-oriented, meaning they often process trade and financial data in large batches just once or twice per day. A T+1 settlement schedule can complicate these traditional batching processes, as trade confirmation cycles will be compressed, thereby requiring more timely and more efficient processing. This could mean that more “pedantic” accounting processes, which oftentimes must be operated in sequence, will suffer from poor real-time input controls, and thus will never get better.

What T+1 ultimately requires is a system that can optimize the entry-to-endpoint process, regardless of whether it’s dealing with one trade or 1,000 trades at any given time. FundGuard processes data as it arrives, including the control validations, and provides more streamlined, timely and error-free processing, significantly shortening the workflow timeline. 

Through the use of modern cloud-native technologies, FundGuard’s framework is free of batch processing and designed to deliver in a constant state of readiness for real-time communication between front, middle and back-office processes. 

2. Maintaining an Accurate Overview of Cash Flow Management

Consider how moving from batch processing to a more real-time accounting system can affect cash flow management.

When performing cash management, front-office teams need to stay in the loop on several key factors — for example, how much cash is shown as available versus how much cash is actually available according to recent trades and ongoing processing.  The accounting system is usually where the reconciliation is done to determine actually settled balances. The reconciliation will also uncover any non-security cash flows and perhaps the rare missed corporate action, but most importantly the investor flows. 

T+1 shortens the time available to communicate to avoid settled cash flow issues, and in turn the accounting engine and its reconciliation process needs to move more quickly, in real-time, not current daily batches. From an accounting perspective, this translates to a need for cash to be taken into account more quickly to provide the front-office with an accurate overview of the actual cash balance available to them. 

3. Dealing with New Regulatory Expectations Surrounding Technology

The popularization of modern technologies like AI, machine learning, and cloud computing has not gone unnoticed by regulators. 

Regulators are now devising rules — like T+1 settlements — that account for ongoing advancements in technologies. With newer technologies becoming more widely available to help unify front, middle and back-office functions, regulators are growing less and less willing to accept legacy technologies as an excuse for non-adoption.

As a result, regulators are placing new expectations on organizations to more readily adopt and implement solutions that support these new requirements rather than continuing to rely on legacy tech. 

To keep up with the quickening pace of the industry, organizations must embark on total back to front office technology transformation. 

4. Migrating Away from Siloed Front-to-Back Office Systems

Traditionally, front, middle and back-office systems have become – even if not originally by design – operationally siloed.

Each function has its own systems and support, and though these siloed systems pass information back and forth, they are not inherently structured to communicate continuously and in real-time. 

This traditional workflow operates with infrequent communications, with the front office typically pushing trade information through to the back office once per day and the back office processing those trades and sending back the relevant data for the front office to use at the start of the next day. At best certain flows are updated by automated messaging in the most sophisticated organizations. Most make updates are manual and only for the largest cash flows.

With the enforcement of T+1 settlements, however, this entire siloed workflow is greatly challenged. 

Organizations need a reliable investment accounting solution that enables live, real-time workflows that break down these silos. This creates an interplay where the back office can report back to the front office with the most up-to-date information in near real-time.  

5. Connecting Back-Office Accounting Teams to Front-Office Operations

Going hand-in-hand with the elimination of front-to-back office siloes is the need to eliminate the fragmentation of these communications, often based on product-specific legacy systems adopted as new securities or functions come online. 

Fragmented data flowing from the back office does not foster a seamless system that supports the front office in meeting the new T+1 requirements. Likewise, siloed front-office operations that use different software and data sets for each asset class or jurisdiction do not facilitate a streamlined flow of data to the back office and can inhibit back-office accounting teams from achieving real-time processing. 

The vital solution to this challenge is establishing an accounting system that can act as a pure source of truth and a modern core that provides a singular data set that flows seamlessly from entry to endpoint. 

FundGuard Offers a Single Source of Truth for Streamlining T+1 Settlements

It is quickly becoming apparent that, as regulators hone in on the powers of advanced technologies, the adoption of more modern, streamlined systems that unite the front-to-back office is crucial. 

Real-time connectivity is key for the back office to support the front office through T+1 changes.

At FundGuard, we understand that true digital modernization starts at the back and moves to the front.

FundGuard provides a single source of truth that is powered by innovative and cloud-native technologies. Regardless of the asset classes, calculations, or any other factors involved in a trade, FundGuard enables a seamless, automated workflow that is easy to integrate as an accounting core and provides real-time data for front-office investment operations. 

With FundGuard, organizations can future-proof their operations and more efficiently embrace regulatory changes with ease and innovation.

Contact our team to learn more.