Changes in market settlement cycles often trigger a domino effect, leading to worldwide adjustments. Over the past few years, we’ve seen a shift to accelerating settlement periods, with China leading at T+0 and others exploring real-time settlement. India moved to T+1 settlement in early 2023 and T+0 is likely.
In May 2024, the US, Canada, Mexico, and Argentina went live with T+1 settlement, sparking discussions in Europe. The European Securities and Markets Authority (ESMA) initiated a call for evidence, prompting responses from stakeholders. The European Fund and Asset Management Association (EFAMA) stressed the urgency of EU adoption of T+1 to prevent lag in capital efficiency and risk management, emphasising synchronisation with the UK to avoid settlement misalignment.
Quick facts
- Settlement Failures: Under the current T+2 framework, five out of every 100 securities transactions fail to complete on their expected date, costing the industry billions.
- European Complexity: Settlement failure risk and related costs are high in Europe due to various currencies, depositories, jurisdictions, and financial penalties under the Central Securities Depositories Regulation (CSDR) framework.
- SWIFT Network Data: Approximately one-third of European customers’ instructions concerning North American equity settlements are initiated after the trade date. While the settlement cycle has already shifted to T+1, delays to the process could lead to challenges in ensuring timely settlements. Potential issues include settlement misalignments and inefficiencies, which may adversely impact capital and liquidity efficiency as well as risk management.
- APAC Challenges: Market players in the Asia-Pacific region are voicing concerns about the adjustment to T+1. Approximately half of the equity instructions from APAC customers are to settle equities in North America. With FX cut off times making it very challenging for firms/investors to execute and instruct leading to increased funding.
It’s crucial for firms to understand that these changes will impact everyone involved in the securities market. You may think this shift doesn’t affect your firm, but the settlement ecosystem is dependent on all firms operating to optimum efficiency. Retail investors all with interests in pension funds are impacted if costs rise for settlement, you might not fully grasp the scope of these implications. Underestimating this transition could lead to significant operational and financial risks.
Gary Wright, is the Director of ISITC EUROPE and a member of the T+1 UK Technical Task Force, he has held senior positions within major financial institutions. Wright, along with Planixs liquidity expert Nick Applebee, discussed T+1, and major trends in the securities market. They focused on the complex logistical and technological shifts ahead, as well as the significant operational overhauls required to support these changes.
T+1 settlement: A noble goal (more or less)
US regulators see cutting settlement times as a noble goal, reducing risk and increasing efficiency. The Depository Trust & Clearing Corporation (DTCC) released a whitepaper, outlining a two-year approach to move the US securities settlement cycle from T+2 to T+1 by early 2024. This update was partly prompted by the events of January 2021, when broker Robinhood faced a crisis after the GameStop stock surge. Additionally, T+1 is intended to drag financial markets into the era of TikTok traders, who find it difficult to comprehend why deals are not completed, signed, and delivered right away. And everything is telling us the future of finance is real time.
“In an increasingly real-time world, T+1 settlement will also help keep traditional financial markets relevant and attractive to investors.” —BNP Paribas, T+1 settlement, June 2023
T+1 settlement: A noble goal (more or less)
US regulators see cutting settlement times as a noble goal, reducing risk and increasing efficiency. The Depository Trust & Clearing Corporation (DTCC) released a whitepaper, outlining a two-year approach to move the US securities settlement cycle from T+2 to T+1 by early 2024. This update was partly prompted by the events of January 2021, when broker Robinhood faced a crisis after the GameStop stock surge. Additionally, T+1 is intended to drag financial markets into the era of TikTok traders, who find it difficult to comprehend why deals are not completed, signed, and delivered right away. And everything is telling us the future of finance is real time.
“In an increasingly real-time world, T+1 settlement will also help keep traditional financial markets relevant and attractive to investors.” —BNP Paribas, T+1 settlement, June 2023
Major trends affecting the securities market
The market will continue to experience rapid changes, with a shift towards real-time processing and potentially T+0 for increased liquidity and accessibility. Transitioning to T+1, however, presents several challenges; there are concerns about potential liquidity shortfalls and increased costs. To mitigate these risks, a smooth transition from traditional to digitalised markets is necessary. According to Wright, this requires significant infrastructure updates:
“We have to move away from batch processing, and we have to move to real-time processing. That’s a massive change, especially in the UK and Europe, which is going to be far more difficult to achieve than it is in the US.” —Gary Wright, Director, ISITC
Distributed Ledger Technology (DLT) is a key part of this transformation, as it promises to streamline settlement processes and enhance transparency. By leveraging DLT, the industry aims to achieve the same end goals as T+1 or T+0, potentially bypassing some of the current system’s inefficiencies.
Wright believes that international cooperation is essential for successful transitions, ensuring market synchronicity and reducing settlement risks. Collaborative efforts will help align regulatory frameworks and infrastructure requirements, facilitating a more seamless and efficient global market.
T+1 impact warnings
The adoption of T+1 settlement forces a tight settlement window post-market closure, necessitating extended hours on the East Coast and even more significant costs further East due to currency exchange liquidity. Asset managers may face unfavourable currency rates and be forced into costly measures like night shifts or additional staffing. The warnings are coming thick and fast.
“While it might be assumed that moving from two days to one day would reduce the available post-trade processing time by 50%, AFME actually estimates market participants will be moving from having 12 hours to 2 hours of post-trade operations time, an 83% reduction.” —T+1 Settlement in Europe, The Association for Financial Markets in Europe, Sept 2022
Before the latest T+1 move, there were predictions of potential liquidity shortfalls. Custody bank BNY Mellon reported that 30% of customer deals settled by DTCC do not yet fit the future criterion: To break it down, 25% of client transactions would need to adjust their workflows to meet cutoffs.
“Settlement failures could impact the entire trade lifecycle, affecting agent lending, cash management, repo pricing and bank balance sheets. Rather than increasing credit exposure to banks, clients may have to borrow in overnight repos to cover any residual balances on their books and settle in the T+1 time frame, lowering repo availability and driving up costs.” —BNY Mellon, The Alta Report, Jan 24
Now, ISITC EUROPE CIC research shows that there has been an increase in costs for investors since the USA moved to T+1. The cost is mainly coming via the increase in spreads and the treasury impacts caused by increased funding. The increased costs are around 4 to 5 Basis Points and significantly higher than was expected prior to T+1. The misalignment between the USA the UK and EU is the cause of much of the increased costs and this will reduce in 2027 when the UK moves to T+1 and hopefully the EU. However, costs as a result of FX funding will continue as CLS remains steadfast in maintaining existing cut off times in NYC.
“I don’t think we’ve done the cost-benefit analysis to understand what the benefits to the investors are, what the cost is to the whole of the industry in making this massive change.” —Gary Wright, Director, ISITC
How to take the pressure off
Top-tier technology is already making the pain go away for firms of all sizes, while others are stuck using Excel spreadsheets. Adopting real-time liquidity management will be essential in navigating the tighter settlement windows and increased demands for efficiency that come with T+1 and beyond. Investing in technology around Treasury management in real time should be considered by buy side firms today in preparation of accelerated settlements worldwide.
“Settlement failures could impact the entire trade lifecycle, affecting agent lending, cash management, repo pricing, and bank balance sheets.” —BNY Mellon, Jan 2024
Planixs case study
Preparing now will ensure your firm is not only compliant but can reap the benefits of moving to real-time liquidity management.
“Improving transaction transparency for all firms on the buy side and sell side is key to managing risk and finding sustainable solutions for the considerable challenges ahead.” —Gary Wright, Director, ISITC
Here is the story of a firm that has completely transformed its old-fashioned ways of collecting data. The firm introduced a powerful tool called Realiti. This is the only software that can give companies real-time data, even if they’re dealing with millions of transactions every hour and have thousands of different accounts.
This clever software was seamlessly implemented with minimal intrusion into the firm’s infrastructure. The move completely changed how the company sees and uses data and has already saved $millions. Here’s how: –
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Streamlining Compliance Processes: Realiti has made it simpler for the company to be transparent about their finances, making audits easier and cutting down the time needed for responding to regulators.
Using Resources Wisely: Realiti has given the company an easy-to-understand dashboard and reports so everyone can see what is happening in real-time. This has helped the firm to use their money in the smartest way possible.
Foreign Exchange and Cross-Border Payments: With Realiti’s help, the company can see where they can make more money and manage their money better in different currencies and locations. This has made it easier for them to do business across the globe.
We are seeing a paradigm shift in how financial institutions manage liquidity and navigate the complexities of modern-day transactions. Realiti has proven its value to financial institutions. The insight and analytics available from this data are transformational across all business units of the bank including Treasury, Operations, Risk, Front Office and Office of the CFO.
In short – don’t guess, know.
