US same day settlement ‘not a good idea’ despite technological advancement

T+1 was among the key trends identified by Coalition Greenwich in its latest report examining what the most impactful market structure themes will be over the next 12 months.

As the imminent US shift to T+1 settlement looms, inevitably the market has begun to look even further ahead to potential same day settlement (T+0), however, this is currently not a viable reality, according to Coalition Greenwich.

Due to the fact that the shift to T+1 will entail a lengthy implementation period, the possibility of a shift to T+0 is already being considered in order to potentially avoid future delays.

Basing its assessment on their recent research findings, Coalition Greenwich explained that the feasibility of shortening the cycle even further “would represent a more radical transformation with far-reaching implications and potential unintended consequences” and demands careful consideration before empirical moves could be made.

This latest report overall highlighted eleven important considerations for the next calendar year as powerful changes continue to reshape market structure over the next 12 months.  

The firm’s most recent report refers to previous research in its ‘data automation: the workflow efficiency game-changer’ study which found that less than one third of those surveyed believed that capital markets professionals are prepared for the T+1 go-live date.

At the end of last year, T0 came under fire from AFME which called it an ‘unrealistic and undesirable’ near term objective. In a letter to ESMA, the Association for Financial Markets in Europe (AFME) was against the immediate shift to T+0, stating: “We emphasise that we do not consider a default T+0 settlement cycle for securities transactions to be a realistic or desirable near-term policy objective.”

Overall, this most recent Coalition Greenwich report asserted that while current technology opens up new possibilities, this does not directly result in good ideas – with T+0 one of them, for now. 

One such factor was the growth of central clearing, which has returned to the spotlight following recent market volatility.

Coalition Greenwich confirmed that it expects to see FX derivatives, US Treasuries and Repo transactions all seeing more clearing going forward. A key contributing factor for banks and investors clearing more than previously is the increasing cost of trading derivatives OTC as a result of uncleared margin rules.

The report also made reference to the recent announcement by the US Securities and Exchange Commission (SEC) that it will require more US Treasury and Repo trades to clear. 

“Reducing counterparty risk for swaps contracts is a no-brainer. Bilateral exposure to another counterparty can last years. Repo trades are, by definition, short term, so they carry less counterparty risk than swaps, but the market’s importance is so great that streamlining the plumbing via central clearing is generally supported by most market participants,” said Coalition Greenwich.

In addition, Treasury clearing mandates are set to take effect in 2026, which if successful will create a long-term ROI which the SEC seeks.

Another key point of attention for 2024 highlighted by the report is the continuation of the ‘exchange buying spree’. 

Since 2021, venues have been continually shifting their revenue mix away from matching buyers and sellers and toward ever-diverse financial universes that span the trading lifecycle.

Examples highlighted by the report include The London Stock Exchange Group (LSEG) having converted itself into a global data powerhouse, ICE is modernising the US mortgage market, Nasdaq making waves in the risk management business, and key players such as Tradeweb and MarketAxess acquiring algo providers.

Read more: Tradeweb to acquire algo provider r8fin as fixed income algo arms race heats up

Last year, LSEG reported positive first half results on the back of strong growth in its data and analytics (as well as its post-trade) divisions.The exchange’s swelling data and analytics business saw its revenues for H1 grow 7.6% to just over £2.6 billion, driven primarily by its customer and third-party risk offering, with the business growing faster than it has for many years.

Trading venues have viewed consolidation as a key method of expanding their offerings, allowing them to become a one-stop-shop for their clients on both the buy- and sell-side. Recent activity also includes: Aquis acquiring a minority stake in OptimX Markets in August 2023; Cboe’s takeover of FinTech organisation NEO, and LSEG’s acquisition of risk management, margining and collateral services business Acadia in December 2022.

Following these moves, 2024 is set to bring even more buying according to Coalition Greenwich, with global exchange groups and non-exchange trading venues set to seek out new asset classes “where e-trading is either emerging (e.g., leveraged loans) or could in time meet the criteria for electronification (e.g., asset-backed securities)”.

Read more: M&A flurry shows no sign of slowing with two trading venue deals announced this week

Looking at the future prospects in 2024, both the buy- and sell-side continue to recognise the importance of adopting a new approach to technological advancement, with the buy versus build argument evolving into buying and building in tandem, according to Coalition Greenwich. 

Specifically, firms are continuing to combine pre-built platforms with proprietary technology systems and so, while this hybrid approach is increasingly adopted, integration is now the priority. 

“Even larger firms that have often built their own fully proprietary systems are increasingly considering integrating specialised third-party platforms due to their cost-effectiveness and functionality […] this approach provides a middle ground, leveraging a pre-built foundation that can be expanded and tailored through additional development or integration with internal systems,” explained Coalition Greenwich.

So, while integration emerges as the logical next step, providers must – and are – focused on ease of use, scalability, and customisation in order to facilitate this foreseeable trend of buy AND sell.

Read more: To build or to buy… how far should predictive analytics go?

Relatedly, the report highlighted that workflow automation is also set to become the priority – no longer focused primarily on the front office but instead transforming more and more into a holistic approach.

Another key trend highlighted by the report includes capital markets continuing to focus on trading cryptocurrency adopting blockchain technology with a significant turning point on the horizon. 

“Corporate and government bonds ‘on chain’ represent a small portion of the traditional market, but that small portion is growing,” Coalition Greenwich said in its report. “Traditional financial institutions, often perceived as slow to adopt innovations, are now making decisive moves into production beyond proofs of concept (POCs), pilots and sandboxes.”

Further, the report highlighted that another additional area where the market will continue to dedicate its time and attention is artificial intelligence (AI).

As data availability and scope has continued to grow, the ability to scale this information will be facilitated in large part through generative AI which makes searching through the large volume of information simpler than it has been in the past. 

Read more: The TRADE predictions series 2024: Artificial intelligence 

The report explained: “Generative AI is on the cusp of taking traders back to the future […] Check boxes and dropdowns are out. Plain language search is in—and it might just make market participants smarter and faster than they already are by putting data to use that last year remained buried in the cloud.” 

Despite the lack of an actual crystal ball, these reflections on how things may play out in the market going forward provide food for thought across the industry. As markets remain unpredictable, there at least seems to be a semblance of agreement around the key structural considerations to watch out for, with 2024 looking like an important year wherein many key industry questions may find their answers, or at least a method of working.

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