What’s front of mind when it comes to Europe’s shift to T+1 from your perspective?
Europe has a complex market structure with multiple exchanges, clearing houses (CCPs) and central securities depositories (CSDs) – each with different operating models and regulations. Unlike the US where DTCC provides a centralised clearing and settlement system, Europe’s diverse infrastructure makes coordination more complex. Many European trades involve multiple currencies and jurisdictions, requiring FX transactions – the shorter settlement time reduces the time to arrange funding and collateral.
The Central Securities Depositories (CSDR) in Europe includes a mandatory buy-in regime which is not present in US. Differences in regulatory frameworks across EU Member states could create inconsistencies in T+1 adoption. Coordination between ESMA, national regulators and industry bodies will be essential.
How important is global cohesion?
The misalignment of settlement cycles between countries that adopt T+1 and other jurisdictions could present some operational challenges. This is a key catalyst for other markets to optimise operational frameworks and ultimately accelerate settlement cycles to a T+1 global standard.
Improving global securities markets remains challenging as broad industry coordination is required to address related operational topics. In Europe, the trading and settlement infrastructure is more complex than in the US, spanning several jurisdictions, with 41 trading exchanges and 31 central securities depositories.
To make T+1 feasible on the continent, any adjustments to post-trade infrastructure, updates to technology systems, or further automation of trade processing would need to be synchronised across these constituents, as would the timing of cross-currency transactions.
Is preparedness an issue in APAC/Australia – will there need to be major changes made to comply?
Preparedness is key, and as with markets that have transitioned there will need to be changes. However, the progression towards T+1 is increasingly a well-trodden path.
This transition is not a competition but a matter of readiness and evolution in operating models. The choice of settlement cycle depends upon market segment, asset class and transaction nature. Markets that leverage this change can reap immense benefits such as advanced operational efficiency, faster settlement and reduced risks associated with market exposure.
The move for India towards T+0 settlement is driven by retail investors and the pre-funded, pre-delivered market structure, contrasting with the intermediated institutional market in the West.
When APAC countries also move to T+1, what are the potential issues which could arise?
Some of the challenges and concerns associated with T+1 include operational challenges, most notably a shorter processing time. This increases the need for automation to streamline post-trade processes. Global investors and cross-border transactions may struggle to meet the accelerated timeline.
A specific point for AU/NZ Managers is that for any AU/NZ clients currently doing processes early on T+1 local time to cover US market close, it will be pretty much impossible to meet the UK/EU timelines which are two to three hrs earlier. This further promotes the need for either a global footprint, or to outsource to firms who have one and can meet regional cut-offs.
It’s also important to note liquidity and funding issues – investors who need to convert currencies may struggle to do so within the day. The shorter cycle may also require firms to post margin or collateral more quickly.
There is also the topic of impacts on international investors to APAC markets with a narrower window to process trades, as well as lending of securities potentially needing to be called earlier if selling a stock that has been lent out, and the risk of more frequent trade breaks with less time to correct errors. Firms settling trades will need to do so in a timely manner to avoid possible regulatory imposed penalties.
What is the impact of fragmentation, both across APAC – including Australia, and Europe?
Fragmentation poses a number of risks, most notably cross-border settlement risks with markets on different settlement cycles – foreign investors may struggle with liquidity and funding mismatches. Also, FX and liquidity management wherein shortened settlement cycles puts pressure on FX funding, as most markets still remain on T+2. Here there may be a need for pre-funding certain trades. In addition, market participants, custodians, brokers and managers need to adjust their processes to ensure reconciliations across the various settlement timelines.
It’s also important to note that differences in countries’ regulatory frameworks may exacerbate fragmentation, most notably reporting and compliance frameworks.
What’s the best way for managers to mitigate risks as the world increasingly shifts to T+1?
No single asset managers operating model is the same, every one is nuanced so the response to T+1 needs to be tailored.
We have been encouraging our clients to scrutinise the entire life cycle of the trade, as well as anything manual, every process and every exception. Data hygiene is imperative – analyse and clean static data and maintain regular reviews to reduce the chance of trade breaks.
Automation and STP is becoming an absolute pre-requisite, and if you can’t resource for it an option is to outsource it. At Northern Trust Securities we have seen a marked increase in component outsourcing, i.e. the outsourcing of a region where you don’t have presence, or you find it challenging. We have seen an increase in offshore managers outsourcing their US flow in response to the tightened settlement, trade matching and settlement, and trade related FX.