The industry has always looked for ways to shorten settlement cycles, but how much further can they go?
By the time 2017 came to a close, the majority of global markets were operating on a T+2 settlement cycle. To reach this point required years of planning, cross-jurisdictional collaboration and extensive testing programmes.
From inception to completion the process saw world leaders come and go and the global landscape undergo drastic changes. But after such a mammoth operation, teams were already searching for ways to shorten the settlement cycle even further.
Pros and cons
In February 2022, T+1 in the US was officially proposed by the U.S. Securities and Exchange Commission (SEC).
This next compression will decrease risk and improve efficiency, it said — something that India already believed, with their two stock exchanges moving to T+1 in Q1 2022. Canada, too, is expected to follow suit.
It is generally agreed that shorter settlement cycles are, in theory, something that the industry wants to see. T+1 has the potential to reduce risk, allow for greater efficiencies and increase liquidity in the market. Pardeep Cassells, head of securities, CSDR and claims at AccessFintech, cites industry publications’ estimates when she says there could be up to 40 per cent improvement in liquidity with T+1 implementation. “It would be hard to overstate the impact such an improvement would have on the market,” she says.
But we are not living in an ideal world, and the problems that come with implementing a T+1 structure leave many less enthusiastic about the project than might be expected. Allen Lewis, director at Sionic, raises the concern that a shift to T+1 could serve to renege on previous progress; T+2 pushed the US dollar into alignment with currencies that were operating a day ahead, however with T+1, it will fall out of step once again.
Although it may seem that T+2 to T+1 will halve the trade settlement time, in reality firms will have to work on a far tighter timescale. Any problems that emerge will have to be dealt with far faster, with the margin for error paper thin.
Even in T+2, “32 per cent of trades are not affirmed on the trade date” says Brian Collings, CEO of Torstone. Tightening the settlement cycle even further will likely raise this percentage, with T+1 leaving no “safety buffer” for delays or mistakes.
“It’s good to think of any complex organisation as having a time budget,” explains Christian Nentwich, CEO of Duco, and in a shortened settlement cycle, this budget will be squeezed alongside its monetary counterpart. Participants must have their trades confirmed and matched before a central security depository’s overnight process begins, leaving them with little time to complete operational processes after the trading day ends and increasing operational and settlement risks.
On your marks
As the pressure to keep up to speed intensifies, firms are being forced to “reconsider and revamp” their technology and address behavioural challenges before T+1 is rolled out, says Colleen Stapleton, product manager for match products at MarketAxess.
This is something that firms need to start preparing for as soon as possible, if they haven’t already; “there is always the risk of unintended consequences for market participants that are not prepared,” warns David Smith, managing director for capital markets practice lead at Broadridge.
Market participants “need to give themselves enough room for building, changing, and testing solutions,” says Meritsoft CEO Daniel Carpenter. That extra space is rapidly closing in, however, with the necessary preparations needing to be complete within 18 months.
The UK has already delved into T+1 preparations, launching an accelerated settlement taskforce in December 2022. The team will evaluate the benefits and risks of a shortened settlement cycle, while finding ways that businesses in the country can keep up with jurisdictions who will make the jump before them. An interim report is expected to be published in December 2023, with the final report scheduled for December 2024.
Aside from this higher-level planning, individual companies are starting to put structures in place to facilitate and ease the transition. Broadridge is updating its current product suite to be T+1 compatible, and Torstone is encouraging clients to replace their legacy systems ahead of the change. The latter adds that these replacements will allow firms to “get ahead of further reductions in settlement time” as T+0 becomes an increasingly plausible reality.
Although many operations will continue as usual, there will be increased pressure on all aspects of the industry when T+1 hits. Sionic’s Lewis outlines five points that must be considered for a successful conversion: strong project management and executive support, detailed planning, coordinated engagement between internal and external constituents, documentation updates (including risk and resilience assessments) and an overall consideration of how T+1 weighs up with existing operations.
An individualist approach to shortened settlement cycles will not lead to satisfactory results, with global communication and collaboration vital to get T+1 up and running. AccessFintech is “actively working with the market to share insights into mismatches and fails,” says Cassells, something that will relieve some of the pressure on individual companies.
Tick tock
As some have already headed into T+1, or are at least well on their way, “harmonising with [them] may be beneficial” says Tim Beckwith, head of commercial development at Cboe Clear Europe. This is simply because not doing so will complicate cross-border transactions and present operational and liquidity challenges, leaving certain jurisdictions behind as the world speeds up around them.
The issue of countries accelerating their processes on different timelines may create a sense of panic for those who are still running behind, with ISITC’s director Gary Wright warning that a lack of harmonisation could create a “two-tier market” in which some can operate in near real-time and others remain stuck with batch legacy systems. The industry is already facing a number of divisions between companies and countries in light of new regulations and standards, with settlement the latest area at risk of this inconsistency issue.
With consideration to time zone differences, the actual amount of time that companies have to resolve any post-trade issues could potentially be mere hours in a T+1 system.
The first step of resolving the challenge is agreeing to move away from end-of-day cycles, says Ed Gouldstone, head of product management for asset management at Linedata. However, he adds that there is no chance of this critical issue being solved “quickly or easily.”
One potential solution is a ‘follow the sun’ approach, in which work is passed between regional teams to keep up with market speed. Outsourcing services to alternative geographies or constructing a second-shift team are also feasible options.
Cboe Clear’s Beckwith expects to see “a much wider implementation of 24/5 operational capabilities than we have currently across the industry.” However, with employee and employer relations not quite recovered from the turmoil of recent years, such drastic changes to working structures could be met with some resistance.
Communicating with clients outside of the US, securities trading organisations will have to be “clear and open” about their operations, says John Bevil, senior solution manager for capital markets at Xceptor. Standardised operating procedures will need to be established, and data must be “watertight.”
Back-office overhaul
It seems that automation is one of the most obvious solutions to the timezone issue; if settlement processes are automated, with occasional human intervention to resolve any pressing issues, then difficulties around the speed at which a settlement must be completed are greatly reduced.
Duco’s Nentwich agrees that automation is vital, highlighting the inefficiencies currently plaguing back offices: “you’d be amazed how many people sit there with Excel spreadsheets, emailing PDF files around.” These levels of manual processes won’t hold up to the speed of T+1, and Nentwich predicts that the next few years will see heavy investment into automation as businesses seek to reduce risks and long-term costs.
Cassells anticipates a change in the back office’s focus, expecting to see it hone in on pre-settlement processes and enhanced matching rather than fails management. This will allow for better feedback to the front office, she explains, resulting in an improvement of the overall process.
Scott Markowitz, Americas head of custody, J.P. Morgan’s Securities Services, summarises that the problems that arise from T+1 “will be nuanced and will depend on what investors are trading, their location and their overall operating models.”
There will not be a one-size-fits-all or quick-fix solution for all across the industry. Firms will need to find what works for them independently, while also collaborating with one another to ensure that the entire ecosystem adapts and runs smoothly.
After all, the chain can only be as strong as its weakest link.
T+0?
Just as the T+2 transition had market participants thinking about T+1, the topic that is now inevitably raised at every post-trade conference panel is T+0. Cryptocurrencies are T+0-native, with the infrastructure around them designed with instant settlements in mind. Although there are many in the industry calling for digital and traditional assets to be treated in the same way, it is undeniable that the new-ness of crypto assets makes it far easier for them to use cutting edge systems and techniques. There is no hassle around changing or updating systems — they are already built for the modern world.
The question of whether T+0 is even viable for traditional markets is much contested, with opinions varying drastically across the industry. From what can be seen so far, with firms struggling to meet the requirements for T+1, it is likely some way off.
However, many think that T+0 is a foregone conclusion: “This is the historical trend traditional markets have been pursuing for two decades,” says Linedata’s Gouldstone, predicting the implementation of instant settlements within the next decade.
Duco’s Nentwich is sceptical about the timeline: “People don’t have the real-time architectures necessary to run T+0 in many scenarios.” T+1 is already a big step, and T+0 might be a stretch too far. “It’s easier in a new market like crypto to start with T+0. But it’s going to take a while to change all the legacy processes.”
Following recent issues around cryptocurrency trading, the importance of a secure regulatory network has become even more apparent, ISITC’s Wright points out. For T+0 to be a genuine possibility, all of those involved in the settlement process must be in agreement on moving away entirely from existing operational systems, and have a clear plan and strong motivation to create an alternative.
Broadridge’s Smith raises the point that T+0 settlements are already possible for equities and fixed income through DTCC — but only because there is little demand for them. If this becomes the standard, he warns, the industry would face infrastructure pressure, high financial costs and increased risk: “at some point, the cost exceeds the benefit.”
Even if the market makes the necessary changes, “we are probably another five years post-T+1 before the industry could move to T+0,” he says.
The thought of moving to a T+1 settlement cycle could be seen as daunting, especially given the high rate of settlement fails seen on a T+2 scale. Without well thought out preparations and industry-wide collaboration, it seems certain that the transition will be a difficult one. That being said, enthusiasm for the change on the level of individual businesses, national governments and international industry bodies alike provides some reassurance on the matter.
While many jurisdictions are only in the early stages of their T+1 plans, it will doubtless become the norm over the coming years. And as for T+0? We’ll have to wait and see.
