Europe should consider getting ahead of the curve and start thinking about moving from legacy to digital systems as part of the move to shorter settlement times, a panellist at this year’s SIBOS conference said.
The comment came from Javier Hernani, head of securities services at SIX, at a panel entitled ‘Is T+1 the goal or a step to instant securities settlement?’, where the pervasive question of when Europe would move to a T+1 settlement cycle was unpacked.
The panel began with a discussion of why the move to T+1 is so important to Europe. Julia Romhanyi, global head of securities services at UniCredit, stated that there are three main reasons for the shift: reducing risk, reducing cost, and increasing efficiency. With technology developing at a rapid rate, she suggested that the industry can be far more efficient than it is.
Olivier Grimonpont, head of product management and market liquidity at Euroclear, added that there is a need to keep up with other jurisdictions, such as India, the US and Canada, that have already made, or are planning to make, the move to T+1.
Grimonpont went on to say that even legacy systems have the capability to work in T+1 or even T+0 cycles, with gaps in the overall process being bridged by the work of emerging fintechs. However, he acknowledged that there may still be “gaps within gaps” that the industry still needs to address, particularly with the time constraints that faster settlement cycles place on problem solving.
Considering the actual change that a T+1 cycle would have, Romhanyi stressed that it is “not a simple 50 per cent reduction” from two days to one, but an 80 per cent reduction when taking into account overnight processing times — in reality, there may be mere hours between a trade and its settlement.
Pierre Davoust, head of central securities depositories at Euronext, cited reduction of time to process trade as the major client concern to be addressed before a migration to T+1, and considered the risk of increased settlement failures that could result from the shift, if the industry is not properly prepared.
Grimonpont agreed, stating that 40 per cent of settlement fails are currently due to them being unmatched, something that would only increase with shortened settlement cycles. He added that forcing T+1 into play too early could cause losses, but equally, friction between different countries using difference settlement models means that Europe has “no choice” but to make the move.
Further exploring this issue, Hernani stated that although there is a reduction in counterparty risk as settlement cycles shorten, the operational risk is greatly heightened. While the T+3 to T+2 shift was “removing a buffer,” moving to T+1 is far more risky.
He added that there are more issues that need to be considered when thinking about T+1 implementation in Europe when compared to other jurisdictions, such as the wide range of currencies and multiple central securities depositaries that will be in play.
A major question for the panel was when they thought that T+1 would be implemented, a question that was also asked of the audience. Romhanyi suggested three to four years, admitting that this may be “too ambitious” but that “we need to be ambitious,” with it becoming difficult to explain why a T+2 format is still being followed.
The audience was largely in agreement, with 37 per cent responding in kind and 51 per cent even more optimistically believing that Europe will be in T+1 in the next two to three years.
Hernani questioned the timescales, suggesting that “if it is more than five years, why don’t we use different technology?” He proposed that Europe think “outside the box” and invest in new, not existing technology when it comes to settlement cycles, being more disruptive to make the upheaval of change worth it.
Grimonpont was more cautious, stating that T+1 was necessary before T+0, to allow markets to adjust. He added that there should have been communication between the US and Europe to coordinate the rollout of T+1, as there will be difficulties in harmonising settlements across different cycles.
The panellists were then questioned on the lack of T+0 taxonomy, to which Hernani again suggested a complete digital shift to avoid further operational risk. However, Romhanyi cautioned that as of yet the “technology is still not there”.
Davoust raised the issue of timezones and pointed out that trading activity does not happen on a 24/7 basis but within specific trading hours, with a lot of trades processed at the closing auction. Settlement cycles need to reflect this reality, otherwise there would be a serious issue of liquidity availability, he said.
Concluding the panel, Romhanyi suggested that there is “still something we don’t see,” a “catalyst” that will change the industry mindset and facilitate T+1 in Europe. Although opinions varied on how and when T+1 will become a reality, the panellists concurred that it is an inevitability. “It will happen — the question is just the time,” Romhanyi said.
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