By Lorelei Karstadt, Director, Asset & Wealth Management Consulting at Alpha FMC

Compressed settlement timelines have exposed the operational limits of offshore models for trade-sensitive functions, prompting asset managers to rethink where complex middle-office work belongs and how operating models should evolve from here.

When the U.S. market transitioned to T+1 settlement, much of the industry’s attention focused on readiness for the new settlement cycle, with the new rule requiring securities trades to be officially finalized exactly one business day after the trade is executed. Firms invested significant time and resources preparing systems, processes, and teams for a shorter settlement window. What received less attention was the pressure T+1 would place on operating models that had been built around large offshore teams separated from investment and trading desks by ten or more time zones.

That pressure is now becoming increasingly difficult to ignore. Recent announcements by asset managers expanding operations hubs in lower-cost U.S. locations have generated headlines, but those moves reflect a broader shift already underway across the industry. For more than a decade, many firms pursued aggressive offshoring strategies as they sought to reduce costs and improve operational efficiency. The logic was straightforward. If a process could be performed reliably elsewhere at a lower cost, it often made sense to move it.

T+1 exposed the limitations of applying that logic too broadly. Prior to the settlement transition, firms had more time to resolve exceptions, investigate breaks, and coordinate across teams before settlement occurred. Operating models could absorb a degree of geographic separation because the settlement cycle provided a buffer. With T+1, that margin for error largely disappeared.

The introduction of the Depository Trust Company affirmation deadline at 9:00 p.m. Eastern Time on trade date illustrates the challenge. For firms relying heavily on offshore teams in India, that deadline arrives at approximately 6:30 a.m. local time. Supporting trade affirmation, exception management, and settlement activities within those constraints often requires overnight staffing models that can be expensive to maintain and difficult to scale. Recruiting and retaining experienced talent for those schedules presents its own challenges, particularly when firms are competing for the same workforce.

The issue extends beyond meeting deadlines. When trade breaks emerge late in the day, operational teams frequently need to coordinate with portfolio managers, traders, counterparties, custodians, and other stakeholders to investigate and resolve the underlying cause. The further those teams are separated by time zones, the more difficult those interactions become when every hour matters.

That does not mean offshore operating models have become obsolete. One of the misconceptions emerging from the T+1 discussion is that all operations functions are being pulled back onshore. The reality is more nuanced. Many activities that are less sensitive to market timelines continue to fit well within offshore models. Functions such as position and cash keeping, reconciliations, and other repeatable operational processes can still be performed effectively by offshore teams and often remain an important part of a firm’s operating model.

The distinction is that firms are becoming more deliberate about which activities require proximity to investment teams and which can continue to benefit from global delivery models.

Private credit provides a useful example of why that distinction matters. Traditional offshore models were largely built around standardised workflows, consistent data structures, and repeatable operating procedures. Public market instruments generally fit that framework. Private credit often does not.

The operational complexity of private credit begins with the asset itself. Credit agreements frequently contain bespoke terms, payment-in-kind provisions, covenant structures, and facility-level requirements that require interpretation and ongoing oversight. Setting up those assets often involves reviewing documentation and translating highly specific deal terms into operational systems. Small misunderstandings at that stage can create downstream issues that become far more difficult to resolve later.

The complexity continues throughout the life of the investment. Break investigations frequently require coordination across portfolio management, treasury, data management, and operations teams. Cash events may be tracked retroactively. Exception resolution often depends on understanding the unique characteristics of a particular deal rather than following a standard playbook.

These are precisely the types of activities that become more difficult when operating teams are separated from the broader organisation by significant time-zone gaps. As firms rethink these challenges, a new framework is beginning to emerge. Across the industry, many organisations are converging on a similar operating model philosophy: outsource the commoditised, insource the differentiators, and nearshore the complex.

The framework reflects a recognition that different types of work create different operational requirements. Highly standardised processes may continue to benefit from outsourcing and global delivery models. Activities that contribute directly to investment insight, client experience, or competitive advantage often remain closer to the business. Complex operational functions that require frequent collaboration and specialised expertise increasingly fall somewhere in between, creating a growing role for nearshore locations that offer both talent and time-zone alignment.

This shift helps explain why firms are evaluating locations such as Canada and lower-cost U.S. cities for certain trade support and middle-office functions. The objective is no longer simply reducing labour costs. It is balancing efficiency with responsiveness, expertise, and operational resilience.

AI will influence where this trend ultimately leads, but it is unlikely to reverse it. Automation is already reducing the amount of manual effort required for many operational processes, and firms continue to explore how AI can improve efficiency across middle- and back-office functions. Yet the activities that remain after automation are often the ones that require judgement, investigation, escalation, and decision-making. Those responsibilities depend on context and coordination, and they benefit from closer alignment with the investment teams they support.

T+1 did not create all of the challenges associated with aggressive offshoring. Many of those issues were already present beneath the surface. What the shorter settlement cycle did was remove the operational cushion that had allowed firms to work around them. As asset managers continue to refine their operating models, location strategy is becoming less about labour arbitrage and more about matching the right work to the right environment. For firms navigating today’s market structure, that distinction is becoming increasingly important.