With just over a year until the UK and Europe move to T+1 securities settlement, the question is no longer whether the funds industry needs to prepare for shorter settlement cycles, but how.
That was one of the clearest messages to emerge from the settlements panel at the inaugural Global Fund Services Summit in London, where I joined representatives from across the funds industry to discuss readiness for October 2027.
Funds themselves are not directly subject to the T+1 securities mandate. But the FCA has been clear about the direction it expects the funds industry to take. For UK authorised funds and recognised schemes investing predominantly in markets moving to T+1, it believes moving fund unit settlement to T+2 would be in investors’ interests. It has also said fund managers should in future need strong justification where, exceptionally, more than two business days are required to settle.
What struck me from the discussion was that this is about much more than changing a settlement date. It is an opportunity to look at how settlement works today, where manual processes remain and whether we really want to carry those processes into a much faster environment.
Doing the same things faster isn’t the answer
One point that came through particularly strongly in our discussion was the importance of automation. Shorter settlement cycles will be difficult to achieve consistently using today’s operating models.
Over the years, significant progress has been made in automating fund trading. But automation doesn’t always extend across the entire trade and settlement lifecycle. Reconciliations, exception management, payment processes and settlement instructions can still involve manual intervention.
There is also a danger that firms overestimate how automated they really are. This was something we discussed on the panel: an electronic payment instruction at the end of a process does not necessarily mean everything that happened before it was automated.
Under longer settlement cycles, the industry has had time to absorb some of those inefficiencies. Teams can investigate discrepancies, reconcile positions and resolve exceptions before money needs to move. As the available window contracts, that becomes much harder.
The answer cannot simply be to ask operations teams to perform the same processes more quickly.
Instead, firms should be looking across the lifecycle. Can trade details be matched automatically? Can exception rules identify problems without somebody first having to find them? Can settlement obligations be brought together to provide better visibility over cash requirements? And, for cross-border activity, can FX and market-specific settlement processes be incorporated into the same automated workflow?
The objective should be to use technology to remove work, rather than simply compress it into a shorter period.
Looking beyond automation
Our discussion also looked beyond the immediate challenge of meeting shorter settlement cycles. If the industry is going to make significant changes to accommodate them, we should ask whether some of the structures we use today still make sense.
Payments are a good example. Simply relying on faster individual payments may technically allow firms to meet shorter deadlines, but it doesn’t necessarily create a better settlement model.
Net settlement offers a different approach. By offsetting inbound and outbound obligations, firms can reduce the number and value of payments that ultimately need to move. That can lower liquidity requirements as well as reduce operational complexity.
T+1 could therefore provide a catalyst for the UK funds industry to look at net settlement more broadly. Rather than viewing October 2027 purely as a deadline to meet, there is an opportunity to use it to create a more efficient model for the longer term.
There won’t necessarily be one answer for every fund
Another important theme from the panel was that the transition is unlikely to be as simple as every fund moving to the same settlement cycle on the same day.
Investor location, currencies, NAV timings, distribution arrangements and the characteristics of the underlying portfolio all matter. For globally distributed funds in particular, shortening settlement cycles can create very different challenges depending on where investors are located and when payment systems are available.
We also discussed the practicalities of how the industry makes the transition. There was a clear recognition that a single ‘big bang’ change may not be appropriate and that careful coordination will be needed across the ecosystem.
Fund managers cannot make these changes in isolation. Transfer agents, administrators, distributors, platforms, banks and technology providers all have a role to play. Firms need to understand not only what they would like their future settlement model to look like, but whether the different participants supporting it are ready to make the change.
A year is not as long as it sounds
Perhaps my biggest concern coming away from the discussion was that there is still a significant amount of work to be done across the industry to prepare for shorter settlement cycles.
It is easy to look at October 2027 and assume there is plenty of time. But before changing anything, firms need to understand their existing processes, identify where manual intervention remains, assess the implications for investors and speak to the third parties on which their operating models depend.
That final point was one I emphasised during the panel. Firms should be engaging with their technology providers, order management systems, transfer agents and other partners now. In many cases, capabilities already exist that can address some of these challenges without firms having to build everything themselves.
We are already seeing this transition begin. Firms are using Calastone’s settlement capabilities to support T+1 funds, while conversations with platforms and other market participants are gathering pace. The technology can support shorter settlement cycles. The challenge now is ensuring the wider operating model is ready to do the same.
T+1 may be the deadline that forces the issue, but the opportunity is much bigger. If we use the next year simply to make today’s settlement processes happen faster, we will have missed it. The real prize is to emerge with a more automated, connected and efficient settlement model than the one we have today.
