Whikie Liu, strategy director for capital markets at Swift, considers the impact that North America moving to T+1 will have on markets across the globe and whether the world is ready for the shift
In today’s world, speed is of the essence. From same-day deliveries to fast food, instant messaging and instant payments – speed and efficiency is expected.
It comes as little surprise that many securities markets around the world are on the cusp of an automation-focused transition to shorter securities settlement cycles.
The typical trade settlement period is set to drop from two days from the date of execution (T+2), to just a single day (T+1). And implementation dates for the reduction are coming up quickly in many countries.
But how prepared are market participants for this change? What will the shift mean for the industry? And what can data from the Swift network tell us about the potential impacts of the change?
Understanding the landscape
Historically, a reduction in the settlement cycle in one market has triggered other markets to follow. Within a period of five years, the majority of the world moved from a T+3 to a T+2 settlement period.
Today, China is operating a T+0 system, with Singapore, Japan and Australia actively exploring real-time settlement. India moved to T+1 in early 2023. And the US, Canada and Mexico have announced dates to shorten their market cycles to T+1 in May 2024, with discussion ongoing in Europe about a potential move.
In 2023, only around 10 per cent of the total Swift securities settlement messages were sent for the purpose of T+1 settlement in equity markets. When the North American markets move in 2024, this figure is estimated to jump to 30 per cent.
In other words, change is happening quickly, making preparation critical.
Potential pitfalls
A recent report by the Swift Institute, Industry Preparedness for Accelerated Settlement, takes a closer look at the opportunities and challenges involved. It outlines the potential benefits of a T+1 settlement cycle, including better mitigation of counterparty risk due to a reduction in processing times, which therefore exposes market participants to risk for a shorter duration.
However, while counterparty settlement risk may be reduced, the report also highlights the significant operational challenges. This is particularly heightened in instances of cross-border settlement, as a result of both time zone and FX challenges, with banks and brokers facing roughly 80 per cent less time to manage the settlement process.
For firms lacking the necessary resources to process settlements in shortened timeframes, or for those that rely on manual processes, the move to T+1 could lead to an increase in the late settlement rate. According to data from the Swift network, within the current T+2 framework, five out of every 100 securities transactions sent for settlement already fail to complete on their expected date. This is costing the industry billions.
And for firms that fail to prepare for the transition to T+1, the situation could get worse.
What does this mean for North America’s transition to T+1?
It is no wonder that there is widespread investor and industry interest in the implementation date of a shortened settlement cycle in North America. Across the continent, market structure has an immense impact on markets, investors and firms around the world. In fact, 23 per cent of all cross-border equity transactions on the Swift network are sent for settlement in North America.
For market participants in Asia-Pacific (APAC), a change to T+1 in North America will be particularly challenging. To date on the Swift network, approximately 50 per cent of equity instructions sent by APAC customers are to settle equity listed in North America. A change to T+1 in the North American region will be particularly challenging to these Asian market participants as they will face considerable time zone pressures.
Preparing for T+1: the global impact of North America’s move
According to data on the Swift network in 2023, approximately 90 per cent of Swift messages sent by APAC customers to settle equity listed in North America are initiated after trade date. Given this, how will APAC financial institutions manage the shorter T+1 process when sending cross-border instructions to North America?
This will be a critical question in what comes next for global securities markets.
Particularly considering that, based on current settlement data, the late settlement rate by APAC customers is expected to increase after the transition.
This rate could potentially be three times higher at T+1 than it is at T+2 if the industry fails to act.
For financial institutions in Europe, the time zone differences between Europe and North America are less challenging.
However, according to data from the Swift network, approximately one-third of Swift messages sent by European customers in relation to settlement of North American equity are initiated after trade date.
Europe’s complexity of multiple currencies, depositories, jurisdictions, as well as the financial penalties in place under the Central Securities Depositories Regulation (CSDR) regime, mean the risk of settlement failure and associated costs to firms is high.
The path to transparency
Improved automation across the securities industry will be vital in a future with shortened settlement cycles. Without it, manual processing and human error will hinder efficiency and continue to result in late or failed settlement.
Another essential element of successful transitions to T+1 and beyond is the introduction of better end-to-end transaction transparency.
Currently, while trade settlement is in-progress, firms can struggle to access real-time information about its status and other counterparties’ progress.
This makes proactively managing risk and resolving issues difficult.
The Swift community is collaborating on the adoption of a shared unique transaction identifier reference among settlement parties and providing access to automated tracking for all participants on either side of a transaction.
This will drive consensus to resolve discrepancies faster, reduce operational complexity and mitigate settlement risk.
Cohesive, collaborative action is key. The transition to shortened settlement cycles is not without challenges. But as an industry, we must continue to work together to increase efficiency, transparency and automation to make the transition successful.
