FIX EMEA 2023: Is the industry ready for T+1?

With the US set to shift to T+1 settlements in May next year, panellists discussed the impact on international markets and whether the UK and EU should follow suit.

At the FIX EMEA Trading Conference 2023, the shift to T+1 settlements was a huge topic of discussion, especially given the US Securities and Exchange Commission’s confirmation to implement the accelerated settlement time from 28 May 2024.

With T+1 now confirmed in the US, panellists at the conference discussed whether the industry is ready for the transition, how it will impact international business, time needed to prepare and whether or not the UK and EU should follow the US’ lead.

“A lot of people are concerned that if you’re looking at what post-trade technology is able to provide today, and where you need to be by 28 May 2024, there’s very little time to build, to specify and implement all of the components of the technology by that deadline. Because of that, there will be a lot of tactical patching of systems and their capability,” said one panellist.

The issue of time zones, and the fact the US essentially sits on the end spectrum of the follow-the-sun model, was also highlighted by panellists, noting the impacts it would have on international trading.

“Considering that 40% of the US market is based on international investments, by the time we get to the end of the US day, markets in the APAC region, for example, are well past being operated on. So, you’re not going to be able to sort out any issues on trade date, meaning you might find that 40% of the US market’s international investment potential will fail,” stressed one panellist.

The potential benefits of the shift to T+1, including the reduction of counterparty risk and the potential to improve liquidity in the market, have been widely discussed. However, one panellist highlighted that the increased focus on post-trade processes is something to be hopeful about.

“Another benefit of T+1 that I have identified is that it is causing people to talk about post-trade at a level that hasn’t existed for a few years. We’ve been doing things the same way for nearly 20 years now – the last time we had a thorough look at post-trade in Europe was the Geneva Reports 20 years ago. It’s good to have people actually looking at the plumbing of the financial markets.”

Given that the SEC has confirmed the US’ transition to settlements for early next year, all eyes are on the UK and EU to see whether they will follow suit. One panellist noted that the UK probably has better opportunities to move to T+1 sooner than Europe, but regardless of this, both jurisdictions should be mindful of the decision.

“My fear, however, is that with the US moving to T+1, the UK and Europe may try and expedite their move which could bring about several challenges. Whether it be funding, FX, timelines at the end of the day or legacy systems, there’s a lot that needs to be considered in a short period of time,” noted one panellist.

Similarly, it was noted that before even considering whether to follow the US’ lead for accelerated settlement times, panellists concluded that a thorough analysis of the benefits and associated costs should be considered.

“If you take a huge step back, T+1 came out of the Edinburgh Reforms which was all about improving competitiveness and essentially how we can enhance UK capital markets. It’s clear that the taskforces have a lot of work to do in terms of understanding the benefits and the costs associated. How do they stack up? Is it important to get to T+1 at whatever date might be reasonable? Or actually, are we raising barriers to entry for the UK capital market?” considered one panellist.