With the US following Europe’s adoption of a shorter settlement cycle, Nicholas Pratt looks at the likelihood of a global standard and a possible move to real-time settlement.
The US is moving to shorten its securities settlement cycle from three days to two, following the lead of Europe, which has been operating on trade day plus two (T+2) since October 2014. It is a move likely to inspire the major securities markets to adopt the same shortened cycle, thereby eliminating any funding shortfalls that result from regional disparities.
The US market’s migration to T+2 was formalised once the chair of the Securities and Exchanges Committee, Mary Jo White, approved the plans of an industry-led steering committee that has set a date of third quarter 2017 for completing the migration.
The European T+2 experience has reportedly been a success. According to a survey of Depository Trust and Clearing Corporation (DTCC) customers conducted in February 2015, 74% believed the migration was smooth and only 12% believed they were unlikely to meet the 99.5% settlement efficiency target set by the Central Securities Depositary Regulation.
For fund managers the process has been relatively painless, at least among those using automated systems, rather than faxes or emails for confirming their trade details. “No new processes were required,” says Tony Freeman, executive director of industry relations at DTCC. “It was more to check that their existing systems could cope with the new time pressures and that they are able to move trades efficiently from the front office to the middle office to be sent downstream to custodians and sub-custodians.”
There have also been benefits. A reduced settlement cycle equals reduced risk, as suggested by a cost-benefit analysis conducted in 2012 by the Boston Consulting Group and commissioned by DTCC. And, says Freeman, there is an ancillary benefit resulting from all of the operational reviews and preparatory work that T+2 readiness entails.
MIND THE GAPS
But the real benefit will come when T+2 becomes a global standard and eliminates the current funding gaps between regions. For example, says Etienne Deniau, global head of business development, asset managers and owners at Société Générale Securities Services, US asset managers with funds that invest in European securities are paying for the underlying securities on T+2 but receiving investors’ cash on T+3. Consequently, says Deniau, they have been turning to their asset servicers for extra financing to see them through the shortfall. “Having the US market switch to T+2 should make this type of financing disappear.”
Other major markets like Japan, Canada, Singapore and Australia are set to follow, albeit in 2018. Once this work is done, talk will inevitably turn to T+1 and even T+0 in the belief that supposed ‘real-time’ settlement will enable them to be more reactive to market changes.
However, this is likely to be resisted by other participants in the securities market.
One issue is the sheer number of messages that would have to be processed and the capacity constraints in terms of computing power, storage and data quality. According to figures from Swift, the number of financial messages has risen from fewer than 2 million a day in 1995 to more than 22 million a day.
The other obstacle would be system complexity. Despite the advancements in automation, there are still participants relying on manual processes, making real-time settlement either impossible or dependent on a high level of investment.
In short, the appetite to move beyond T+2 is not commensurate to the amount of trouble involved. So for now, investors and managers will have to be content with the fact that at least every major market should be on the same if not the shortest cycle by 2018.
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