Charlie Geffen, head of the UK’s Accelerated Settlement Taskforce, updates AST on the group’s progress so far
At the end of last year, participants in the UK’s Accelerated Settlement Taskforce received a letter informing them of a delay to the group’s initial report. Rather than being published in December 2023, as had been planned from the taskforce’s inception, the letter announced that initial findings and recommendations for a move to T+1 would instead be released in Q1 2024.
With North America hurtling towards go-live in May, why the UK’s delay?
“The deadlines on these things are there for a purpose — they’re there to make things happen,” explains Charlie Geffen, who leads the taskforce. “But there’s no point in being rigid about them if they don’t make sense.” While he believes that the taskforce has made good progress so far, discussions around the topic are constantly evolving. There’s more to be learned, and rushing to take action on such a momentous project for the sake of a perfunctory deadline could be detrimental.
Catching up
Over the past 18 months or so, industry engagement with T+1 has only increased. Not only have events, such as DTCC’s ‘Accelerating to T+1’ series, provided crucial educational tools for market participants, but conference panels across the world have been unable to avoid the topic. “This is a good thing,” Geffen states, “because it gets people to really think about the issues around T+1. It has created momentum.”
While the primary focus tends to be the North American move to T+1 and the impact that this will have on global markets and operations, questions of when the UK and EU will follow have also been prominent talking points. “There can’t be anybody in the post-trade world who’s not aware of what the Americans are doing, or of the UK taskforce, or of the ESMA consultation,” Geffen affirms. Canada is scheduled to make the change to T+1 settlement on 27 May, followed by the US the day after.
Currently, a phased approach is the favoured method for T+1 implementation in the UK — yet no one approach has received unanimous approval. Geffen supports an incremental strategy, suggesting that this allows market participants to begin investing in the back office and automation before the shortened cycle comes into play. “Investing in automation is a precondition to move to T+1 anyway,” Geffen explains, “so the market should get on with that before the actual transition begins”.
“[It will also] enable people to learn lessons from the US this May,” he says, and — if all goes to plan — ESMA’s consultation findings and the UK taskforce’s report, which are expected to be released over the summer and in Q1 respectively. Geffen hopes that once the taskforce’s technical group, announced December 2023, has been formalised and is up and running, it can “spend the first eight or nine months of this year working through the issues that have been raised so far, and then confirm the timetable in September”.
Issues arise
Considering the issues that have been raised thus far, “the past year has revealed a pretty strong consensus on what needs to be dealt with,” Geffen says.
Research from organisations including UK Finance and AFME has outlined a number of key challenges around T+1 implementation, one of which is scope. “The UK is a more global market than New York,” Geffen explains. “Something like 60 per cent of equities held on the stock exchange are held by non-domestic investors.”
The original EU settlement cycle is determined by the place of trade rather than the place of settlement, which raises issues when non-UK government bonds are traded in London but settle in the EU.
“It doesn’t make sense for the UK to determine settlement cycles for those non-UK government bonds just because they trade here,” Geffen continues. “There’s complexity around scope.”
Another challenge facing the industry is “a misalignment between the settlement cycle at the top of an ETF and the underlying basket of securities” as well as foreign exchange.
“A particular issue is for APAC investors trading at the end of the day who need to execute an FX trade to convert their local currency into US dollars,” he explains. “In a T+2 environment the middle day is available for the FX trade. In a T+1 world the FX trade has to be transacted at the end of trade date when the market is likely to be thinner. There are plenty of institutions reviewing how they can do their FX trades on trade date more effectively,” Geffen says. With the US transition, some are bringing in FX desks in New York, if they don’t have them in place already. This tactic provides another opportunity for other jurisdictions to learn from the US before putting their own arrangements in place; we’ll see how it goes”.
Along with these cash liquidity difficulties, “one of the bigger challenges that people are identifying in connection with securities delivery is in managing stock lending and recalls”, Geffen says.
If people trade at the end of the day, there’s a very short window to get their recall back in order to settle the next day. Without that middle day, “it will be quite a tight squeeze. I think this is where people are most anxious,” he shares, adding that market participants will be carefully monitoring the North American shift to see how such issues are resolved; “clearly, there will be lessons to be learned.”
Behind the scenes
In order for a shortened settlement cycle to go live, mechanics need to be put in place for the industry to function efficiently. Geffen identifies a need for the industry to dial in on back-office processes, an area that has historically “struggled to attract investment”. This need for resources has become clear as the groundworks are laid for T+1, he reports.
“Nobody’s going to invest in T+1 processes unless everyone does,” Geffen says. “That’s why a regulatory mandate is needed as well as a clear timeline.”
Expensive and burdensome implementation is another deterrent for market participants, with — to some observers — the high cost appearing inconsistent with the benefits. “Often, the people who have to spend the money to get ready for T+1 are not the people who benefit in the short term,” he explains. “A general improvement in the ecosystem benefits everyone, of course, but that’s a little less tangible when you’ve got to write the cheques and spend the time.”
Alignment
Discussions around the UK’s move to T+1 have sparked intense debate. Some believe that the country should have aligned with the US, while others endorse waiting to make the move alongside the EU. A third constituency of participants believes that the UK should take this chance to go live with T+1 before the EU and gain a competitive advantage. On this last point, Geffen is clear: “I think it’s important that people understand that this is not a political issue.”
He recalls no mention of the Brexit dividend or suggestions that this could get the UK ahead of the EU in his talks with the government. “What matters is making sure that the UK remains competitive with the global trend for faster settlement cycles.”
Making the move
“You can’t get the UK to move to T+1 until it’s ready,” Geffen concludes, “and it’s plainly not ready today.” He goes on to predict that if the ESMA consultation promotes the EU’s transition to T+1, market participants will start getting prepared for a formal mandate. “T+2 is currently a maximum, not a minimum,” he says, expecting more people to trade on T+1 when there’s more certainty around the move. This would help to facilitate a smoother transition once the time comes, with firms already prepared to operate on a shortened cycle.
“Early on, the question I was asked was, ‘should the UK move to T+1?’ If you change that question to ‘should the UK remain on T+2 indefinitely?’, the answer is pretty obvious,” Geffen says. It’s inevitable that the world is moving to faster settlement cycles — “that’s not in contention”. Now, “it’s a question of how it’s done, and how it’s done safely.”
