At InvestOps Europe today, panellists under Chatham House Rules discussed transitioning to T+1 settlements: What are the transferable lessons to take from the strategies and tools the US market has leveraged to comply with regulatory requirements in moving towards T+1 and how can operational teams scale capabilities globally?
Collaboration was key, the panel agreed, in order to make a success of T+1 settlement. And while the industry is looking ahead, it should be preparing for T+0.
In terms of the lessons learned from a global perspective in the implementation of T+1, one panellist said that it forced their firm to seek partnerships, seeking commonality and moving towards a real-time model across the organisation. “In the US, there’s been a lot of activity over the last ten months, when things started to get real. The clock is ticking,” they said. “The lesson we took from that is you can’t start too soon.”
Another panellist agreed on the point of collaboration, ensuring partners, whether data brokers or banks, are using the same data. “If we’re not lined up on how we interpret the data we are just going to multiply the challenges and problems we currently have, with fails or breaks.”
The third panellist saw the US, “where everybody is very fortunate to be working with DTCC as the single payer market.” Looking at Europe, there are 39 central securities depositories (CSDs). “It’s going to be an intense amount of work.”
Looking at the Americas, there was consensus that behavioural changes, operational transformation changes that are being put in place to achieve an accelerated settlement cycle, should be a lesson European firms can apply in their transition.
As the settlement cycle shortens, firms should have a good idea of which trades are going to settle cleanly, without intervention, and which trades need work in order to resolve them ahead. “T-0 settlement, T-0 operations or T-0 settlement finality is something that we really believe you should be building out globally today,” one panellist opined. “It’s the best way to ensure that you’re going to get ready for a European go live.”
Reflecting on the past, one panellist said that since T-3 and T-2, the industry has become much more global. “It’s a totally different world. People trade all over the globe and things happen increasingly in real-time.”
As an industry, all participants should be feeding into regulators to determine what needs to happen to make T+1 a success. Working with industry trade associations, having conversations with them upfront and getting anticipated issues hashed out in advance will be key.
The increasing importance of pre trade or pre trade enablement is going to play in operations was also highlighted. “You have got to have confidence in what is coming down to you is accurate, correct and complete.”
Another concern is a bifurcated settlement cycle, in which people will be focused on settling on T-1 in the US that you’re actually going to see issues with European settlement. “You are risking further exposure to CSTR penalties or potentially even increased fail rates in Europe, because you are de-prioritising because you think you have that extra day?”
Data management and data standardisation will be essential to T+1 success, with multiple global custodians, multiple processes, whether it’s Swift or account number requirements. “It creates an element of operational risk.”
Therefore, getting industry to agree and define best practices in terms of collaboration is important, the panel agreed. “We won’t be successful unless we collaborate, it is as simple as that. Interoperability is critical.”
Inevitably, the move towards T+1 settlement begs the question of when T-0 settlement will come to the fore. “It’s inevitable,” one panellist said. This inevitably reflects a mismatch between financial services and the ‘real world’, where one can buy something on Amazon and receive it the same day, but it takes two days to receive shares once bought.
While opening up the engine for T+1, it would be foolhardy not to look at T+0. Not least because it would save money in the long run, especially if 2029 is the mooted date for T+1. “We have six years to start building and start working on that.”
The main obstacle to T+0, one panellist believed, is the “rigid” institutional infrastructure, at least in the US. “That’s going to have to change.” Is the infrastructure robust enough to deal with that kind of cycle timeframe, one panellist asked.
“While these questions appear theoretical today, the industry needs to start considering them quickly and soon because when we get to T+0 settlement, it will be too late. You want to start future-proofing today.”
© Markets Media Europe 2023
