Attendees at the FIX EMEA Trading Conference said T+1 is the greatest regulatory headache currently within financial markets, though 70% of the audience said they will be ready for the acceleration of settlement times come May.
With markets just months away from North America moving to T+1 settlement, panellists discussed market readiness and whether the rest of the world should follow suit.
One panellist noted that with this transition, a consideration of an early close to US markets would allow trades to carry on afterwards as they are now, but in the next day’s business. “That will allow the time pressure to be released, allowing us to match with brokers, generate FX, execute FX and still clear it centrally through CLS, rather than bilaterally, which increases risk.”
Although the panellist highlighted that this would be unlikely, they added that it would be a logical next step to ensure post-trade processes to work efficiently.
A key issue that has been discussed widely linked to the transition to T+1, is the likelihood for increased settlement fails.
“The problem with trade fails – particularly an increase in trade fails – is it will increase the need for borrowing which on a normal day-to-day basis would not be a problem. However, if there is a credit crunch, holidays, etc, and there isn’t funding available, it will either cost a lot of money or not be available at all, resulting in more fails,” noted one panellist.
Another panellist echoed this sentiment, highlighting that risk has been an “underused” word in this transition, emphasising that risk should be the main protocol and focus area.
A key issue with North America’s transition to T+1 is the impact this would have on smaller firms, panellists stressed.
Unlike big players, which have various geographical locations, smaller names may have to set up US shift to align with this new transition – which could have negative social impacts and, in some cases, increased costs.
The end investor should be a key consideration, stressed panellists. “More systems will equal more costs which the end investor will ultimately face. This can also affect competitiveness for new entrants due to these increased costs.”
Largely agreed upon at the event so far is that whether the UK and the EU will follow suit is simply a matter of when and not if. As a result, various jurisdictions should start making preparations.
“The market needs to move together,” emphasised one panellist. “It’s not about one firm in isolation, varies parties will be impacted by any shifts and they need to be aligned.”
Another panellist echoed this, highlighting that financial markets are all about interconnectivity, harmonisation and standardisation.
“The US has rightly or wrongly kicked off this process and we as international markets do not have any other choice but to follow that process in order to maintain that harmonisation.”
Panellist said that UK, EU and Swiss alignment would be essential to any potential moves to a shortened settlement cycle in the region. However, whether or not a ‘one-size-fits-all’ approach would work is yet to be seen.
“In a perfect world, the UK and EU would move together, making life simpler. The question is time frames and whether they can actually move at the same time,” concluded one panellist.