Since the crisis of 2008, regulatory bodies have marked their clear intention to mitigate risk wherever it may arise by bringing out a series of regulations and other directives.
Since the crisis of 2008, regulatory bodies have marked their clear intention to mitigate risk wherever it may arise by bringing out a series of regulations and other directives.
Against this backdrop, shortening lead times has been thought to be one effective way of mitigating certain risks, and several pieces of legislation have therefore imposed strict lead times on the various stages involved in processing a trade.
The European short-selling regulation has reduced the lead time for triggering the buy-in procedure from three days. For trades executed on OTC derivatives, the European Market Infrastructure Regulation (EMIR) requires both rapid confirmation of the terms of the contract and reconciliation of the positions of both parties within very short timeframes.
In the same vein, the Central Securities Depository (CSD) Regulation reduces the settlement cycle of most European countries from three to two days after the trade date, reducing exposure to counterparty risk accordingly.
SLIB always pays very close attention to what markets are saying. Here is the software program writer’s perspective on the challenges and impacts caused by the reduced settlement period.
Impact of transition to T+2
All market players will be affected by this: brokers, assets managers, custodians, central counterparties, and international CSDs. There are a number of different types of impacts on institutions—in terms of business, organisation, legal documentation, tax, risk and IT systems.
There are also multiple levels of processes affected by the transition to T+2—from confirmation of trades right through to management of corporate actions, not forgetting settlement, of course.
Even though the impacts may be very different in nature, all of the various links in the trade processing chain will have to be accelerated and the processes optimised. Specific attention must be paid to the organisational processes in order to support the response time expected in handling restocking pauses.
To summarise, in very simple terms, post-trade processes will have to be one third faster overall than they were prior to the transition to T+2. That being said, even though some of them are already very much straight-through processes, others are in need of improvement.
In addition to this issue of reduced lead time, brokers may have another issue—the need to respond to the demand by some of their customers to carry the trade for one additional day in order to delay settlement until T+3.
Faster confirmation
The process of confirming trades is a key step in the service a broker provides to its customers. It ensures that both parties are in agreement about the terms of the trade executed by the broker on behalf of its customer.
This process already meets three types of stringent conditions in terms of time schedule:
The broker often has a contractual obligation to confirm its trades within the shortest possible lead times.
Reducing the time between the execution of the trade and the customer’s agreement mitigates the risk attached to this period of uncertainty.
The broker’s customer must not undergo compulsory validation and must be able to dispute the terms of the trade before commencement of the settlement process.
Reducing the settlement cycle from T+3 to T+2 will mechanically lead to less time being spent on confirmation. For many institutions, this constraint will require their operational procedures to be optimised and will need electronic confirmation tools to be used more systematically.
Regarding the way their confirmations are disseminated, brokers depend to a great extent on the technical resources used by their customers. Even though there may be many different media, and even if email is still in widespread use, several electronic confirmation media may be considered as repositories. The main ones (not counting the stock exchanges’ or CSDs’ proprietary systems) are:
OMGEO’s Central Trade Manager;
SWIFT’s Global Electronic Trade Confirmation; and
FIX confirmation messages.
Although considerably improving the STP rate for the confirmation/allocation process, these electronic formats are, because of their diversity, a source of complexity for IT systems. In fact, the large number of different formats, protocols, workflows and exchange procedures requires tailored control and oversight tools.
This refers to tools that allow for:
A flexible and configurable way of tracking confirmations that enables the broker to customise its confirmations based on his customers and to use different criteria to specify the method(s) of dissemination on the various channels that are to be used.
Formatting and exchange of messages in the appropriate format and according to the appropriate protocol.
Centralised control of confirmations providing management of exceptional flows with real time status and alerts in the case of anomalous situations.
Faster settlement
The transition to T+2 also involves knowing how to generate and match settlement instructions (SI) more quickly.
This requires processes with no restocking pauses, which clearly identify the customer’s custody, by relying on sound repositories that may be fed into by external sources (eg, the Omgeo ALERT database or a custodian’s/CSD’s data).
This also requires oversight and control tools that can quickly detect, summarise and transmit settlement instructions whose status requires an intervention.
Finally, the transition to T+2 requires specialised forecast management that more rapidly anticipates the risks of default for failure to provide securities or cash, so that the trader has time to take the steps needed to prevent those risks. Forecast management must also facilitate management of securities carrying for a broker wishing to offer this service to his customers. What is SLIB offering?
These requirements generate new needs in terms of STP software so that full advantage can be taken of the benefits of the reduced settlement lead time.
SLIB offers software solutions for faster confirmation and settlement, while simultaneously controlling its entire business.
Faster response times
How much time do teams need for responding if there is an incomplete allocation? Or execution of a trade is still pending? Or if there is an adjustment request? How can consistency and risk control be ensured? And what’s the plan for managing the progress of trades made on all markets?
Team response times are boosted if they have consolidated dashboards and a system of business warnings in push mode for responding more rapidly to an anomaly once it has been detected.
SLIB’s brand new middle-office software platform is equipped with a sophisticated system of central business monitoring, providing real-time dashboards for tracking middle-office activity and proactive business alerts, enabling teams to improve in terms of response time and quality.
This shared tool for operational staff and management increases processing effectiveness as well as the quality of the monitoring of the service that is provided to customers. The push mode alerts enable traders to be more reactive and to manage only exceptions, their priority being to intervene after the alerts and deal with them.
Smoothing out middle-office complexity
SLIB Middle Office flexibly manages all the current (and future) complexity of the pre- and post-trade environment: multi-venue (where trades are executed), order internalisation, order carry or transfer to an external broker. But there is also a huge range of different configurations: multi-currency, multi-venue, multi-instrument, multi-environment, and sharing of ideas with multiple tools.
As a result of native integration into middle-office processes of an adjustment tool with the manager (SLIB Confirmation), connected to networks or exchange protocols such as SWIFT, Omgeo CTM and FIX, local systems such as State Bank of India in France, fax/email, and so on, users do not manipulate any data outside of the vertical business chain from the time executions commence right up until allocations are sent to the back office.
Better liquidity control
SLIB Settlement is SLIB’s international hub for management of settlement instructions. It is for all post-trade stakeholders, whether they are brokers, clearing houses or settler agents/custodians.
SLIB Settlement can be split into two major areas: central interactive control and consolidated forecast management.
In concrete terms, a settlement dashboard gives operators faster response times by tracking the change of settlement instructions status on an ongoing basis.
This dashboard gives a global view or allows the back-office operator, in just a few clicks, to get the details of a settlement instruction that they wish to examine more closely.
Forecast management optimises changes in positions with various different depositories and better anticipates the needs of lending and borrowings or cross-border instructions. Still on an ongoing basis, the back office can easily view the interim securities positions based on multiple criteria, such as ISIN code, depository, and so on. The exceptions, such as lack of stocks or cash debit positions, are clearly identified, allowing for the rapid detection of risks of settlement failures.
Increased versatility, faster response times and improved anticipation of liquidity, the new version of SLIB Settlement is a genuine central universal hub for efficient control of instructions. Opened upstream to downstream, this powerful tool is a real asset for our customers at the dawn of T2S.
The transition to T+2 must be perceived as a genuine opportunity for stakeholders to equip themselves for better STP, in other words, an investment that is absolutely crucial as we fast approach T2S.
T+2 is in some way a catalyst that will increase post-trade efficiency, and is expected to reduce risk and simultaneously reduce the time during which utilisation is made of collateral, which, as we know, is a rare and precious commodity.
SLIB’s renowned expertise as a historic provider of securities solutions make it an ideal partner to help institutions navigate in this new European landscape.
