As firms pursue their T+1 transformations, they will find new opportunities to enable operational and cost efficiencies in post-trade functions.

Many financial firms are seeking to boost their competitive edge by increasing back-office efficiency and reducing back office costs. US firms and those that trade heavily in the US are simultaneously facing another back office mandate: preparing for the hidden challenges of T+1. Effectively, T+1 means that most critical post-trade functions will need to occur on trade date. Theoretically, this should be good for profitability thanks to reduced margin requirements and market risk. However, T+1 will put added strain on the middle and back office, and inefficient post-trade functions will quickly eat away at margins.

To achieve this outcome, firms can leverage a multi-pronged approach that improves digital design, leverages new fintech partnerships and re-platforming, revisits operational efficiency, and advances IT transformation through new ways of working. In many cases, the ideal strategies are not limited to the middle and back office themselves, but rather stem from more seamless front-to-back integration.

Digital Design

Today’s financial firms need more than just data — they need actionable insights. And these insights need to flow effortlessly across the organization. Crucial insights from trade execution need to reach the back office, so that the back office can optimize functions like risk modeling and regulatory compliance.

Achieving a more efficient and integrated data stream requires advanced digital design. To support growth amid high volumes, many firms have explored low-cost outsourcing. This operational solution needs to be combined with technology solutions that can further achieve economies of scale. RPA and AI/ML have already brought new efficiencies to the back office and increased straight-through processing (STP) rates. Firms are also beginning to embrace natural language processing, citizen developer tools, blockchain and alternative datasets to gain competitive edges. We recently worked with an asset management leader to improve digital design by building a reference data distribution hub for distributing reference data from their security master to multiple downstream applications. As a result, the company reduced its overall total cost of ownership by 20% while gaining new process efficiencies. 

 As they pursue these kinds of digital design improvements, firms also need to reconsider their cloud infrastructure. By bringing the front and back office into a single cloud environment, firms can ensure that each position and transaction datapoint is recorded in the form of a single “golden copy,” thereby avoiding the costs and inefficiencies of reconciling the same pieces of data numerous times in a single trading day.

Fintech Partnerships and Re-platforming

Financial firms are now presented with a vast array of potential partners, from core asset-management platforms to pure play low-code/no-code apps, niche transformation tools, and risk and compliance partnerships. As T+1 nears, they will need to continue onboarding new fintech partnerships that can add efficiencies. Automation partners, for example, can now leverage generative AI to automate the non-standard legal agreements and collateral documents that add complexity to private debt and private equity assets.

At the same time, firms need to look at their platform/applications estate from a more holistic perspective, and view T+1 as an opportunity to retire outdated partnerships and pay down technical debt, focusing on consolidation and reducing redundancies. This may result in an architecture in which a single platform supports front office functions for one product, as well as back office and risk functions for multiple products — a flexible, hybrid approach to front-to-back integration.

Operational Efficiencies

Trade volumes surged during the pandemic and remain high compared to recent historical averages. Capital markets firms that relied exclusively on captives to negotiate those initial surges have now started to explore third-party vendors to complement their captives and supplement their growth strategies. With a potential recession looming, capital markets players will need to continue building agility and resilience to ensure reliable service delivery amid potentially volatile shifts in trade volumes.

Revised business continuity plans (BCPs) can take advantage of third-party providers that leverage the cost savings of hybrid/WFH outsourcing models. However, it is crucial that any third-party provider also bring an IT backbone that can mobilize resources quickly and support that more cost-efficient labor model. For captives, meanwhile, choosing the right location basis and appropriate talent will be crucial amid the shift toward a T+1 settlement schedule.

Additionally, new regulations are bringing other operational risks into sharp focus. As they seek to efficiently harmonize their T+1 initiatives with other regulatory initiatives, firms will need to conduct regular operational resilience assessments to ensure business continuity amid changes to processes, systems and people.

New Ways of Working

New ways of working, such as DevOps/DevSecOps and agile engineering approaches, are radically decreasing time-to-market for new products. Pod-based engineering, for example, is accelerating the development cycle in the insurance business by enabling cross-disciplinary teams to innovate. In a financial context, firms can use these approaches to boost time-to-market without creating front-to-back misalignments. Agile pods that incorporate both front office and back office expertise will help ensure that innovative new products and approaches on the trading side do not end up adding unsustainable costs and operational burdens to the back office.

Treating T+1 as a Transformation Springboard

As technology innovation continues to impact financial services, solutions like a shared industry blockchain are likely to bring about T+0 and real-time settlement. Until that happens, firms need to take advantage of the coming T+1 transition to update their technology systems, align their apps and platforms, and reorient their teams and operations with a goal of achieving durable efficiencies and cost reductions. The firms that view T+1 as an opportunity rather than a burden, and continue to lower their cost per trade, will come out ahead in the era leading up to T+0.