Buy-side ‘aware and worried’ about T+1 as implementation and testing ramps up

Europe and Asia Pacific firms are honing their focus in recent months amid mounting pressure surrounding the shift to T+1 in North America.

The buy-side are “aware and worried” as the US shift to T+1 looms closer and the testing phase begins globally, a panel held by the Association for Financial Markets in Europe (AFME) has said.

Panellists raised concerns over FX, settlement fails, and potential regulatory hurdles during the webinar held by AFME on 27 June.

Speaking to the key considerations for the European buy-side community, Susan Yavari, regulatory policy advisor – capital markets at European Fund and Asset Management Association (EFAMA) highlighted that identifying potential pain points is the overarching focus.

The buy-side are “aware and worried,” she said, confirming that implementation had only begun in the last few months. Yavari stressed that the principal challenges stem from the settlement mismatch of T+1 in the US and T+2 in Europe and the subsequent funding gap.

The shift to T+1 presents a growing list of operational challenges to the buy-side. Chief among those raised by the panel is the question of how much cash can be held in funds and the potential for an increased number of regulation breaches during hold ups. Other difficulties also arise from having to recall stocks in a much shorter timeframe.

Potential solutions around operational challenges include European night desks or US buildouts, however, both are potentially costly and therefore not viable options for all firms.

Specifically with regards to foreign exchange, working from a new compressed timeframe makes the market a much less attractive environment in which to source FX, Yavari explained.

The rule amendment has had operational consequences across Europe thanks to the level of interconnection between US and European securities. However, despite the forewarning there are significant gaps in levels of preparedness, the experts agreed.

Barnaby Nelson, chief executive of The ValueExchange highlighted that their studies had demonstrated significant differences between firms’ readiness.

The recent report from The ValueExchange found that only 46% of the market is on course to be ready for the shift to T+1 next March, with “investors so far not engaged”. The paper suggested that investors risk overestimating their reliance on their service providers in their efforts to prepare.

Though the speakers agreed that there had been a lot of ground made up in the last couple of months, Nelson explained that there are a portion of institutional investors who are not yet where they need to be and must move on from the scoping phase into the project phase now.

Nelson also suggested that the idea of setting up settlement teams for failure must be avoided and T+1 should be viewed an enterprise-wide conversation and fundamentally something that affects various stages, from onboarding, to middle-office allocations, and funding.

This was echoed by Emmanuelle Riess, custody product manager and Director at BNP Paribas, who expressed that preparation at all stages is the key to operating efficiently in this compressed environment.

She highlighted the importance of both downstream and upstream systems maintaining a smooth and timely flow between them in order to be successful at the end point, with all pre-settlement controls correctly executed.

Empirically, Riess confirmed that BNP Paribas is focused on “a healthy review” of its technology across these stages, looking at automation and towards removing manual tasks.

She expressed that it is the preparedness of clients, and communication with them, which are the key pillars for a successful transition to the new system.

Sachin Mohindra, executive director at Goldman Sachs added that for their clients, efficiency in middle-office processes (post-trade processing time between trading and settlement) is the main focus now whilst getting ready for the move. He highlighted that over the next few months solutions for the FX access to liquidity should be prioritised.

Following the US Securities and Exchange Commission (SEC) vote to shorten the settlement cycle to one business day back in February of this year, the market now has until 28 May 2024 until implementation.

A recent T+1 event from Xceptor found that over half (52%) of participants believe that next year’s deadline will be postponed.

Yavari highlighted that the lack of a seamless and coordinated approach to this transition since its inception was in her opinion largely down to the ‘T+1 playbook’ focusing principally on the domestic US market, suggesting that – though one third of the US equities market is owned by foreign investors – there was a fundamentally unbalanced approach to the T+1 project.

She added that the momentum from the meme stock saga in early 2021 being the trigger for T+1 being pushed through – which the DTCC are not keen to acknowledge – was arguably not the best motivation to implement a new policy.

Closing up the discussion, panellists also touched on the potential for reinstating global harmonisation in the form of T+1 in Europe, and the challenges this could present. Pablo García Rodríguez, manager, post-trade at AFME, stated that there are several significant structural differences needing to be considered before this possible move.

In particular, he called attention to the fragmentation of European markets and the distinct regulations and tax regimes across jurisdictions, explaining how reintroducing alignment on a global level would be a significant challenge as a result of the differences between the US and Europe.

Additionally, he identified the relevance of different CSD’s (Central Securities Depository) across the EU member states, highlighting that within the CSD regulatory space, cash penalties are already imposed on participants failing to settle transactions on its due intended settlement dates. Within a T+1 timeframe, these issues would just be exacerbated, he explained.

An EU T+1 taskforce has been launched with two separate work streams, according to AFME. As well as focusing on the US T+1 impact on European markets, subgroups are also reviewing whether the EU could and should move to T+1.