Post event review on T+1 Settlement – a race against time
The North American move to trade date plus one (T+1) settlement on May 28, 2024, will have the greatest impact on global capital markets in over a decade. The effects of this change will reverberate in different ways throughout every type of firm, large and small, on both the buy and sell side as well as the critical supporting infrastructure providers. Although the US timetable is extremely challenging, no one should be under any illusion, this change is coming and it’s a change likely to come to the rest of the world in the near term, especially in the UK.
This post event review provides information on the ISITC Europe T+1 forum executive briefing held on the 19th of July which discussed the move by North America and (in due course) the UK, to T+1 settlement cycle. It focused on what this transition would mean, how the Capital Markets could benefit from it, and how it can be more prepared. This post event review offers special thanks to our speakers John Gavin (ISITC Europe), Guy Carter (EY), Charlie Geffen (HMT UK Accelerated Settlement Taskforce), Gary Wright (ISITC Europe), Taruna Bhagtani (EY) and our panel members Jaime Healy-Waters (Citi), Paul Baybutt (HSBC), Brad Bilgore (EY) and Tony Gandy (Visiting Professor at London Institute of Banking & Finance ).
The session started with an opening address by Charlie Geffen, Chair of HMT UK Accelerated Settlement Taskforce, who highlighted that the UK move to T+1 is inevitable, the question was ‘when would the transition occur’ rather than an ‘if.
There was a strong consensus that the T+1 route is where UK is moving towards, but a lot of anxiety amongst market actors on the pace of change. Many firms struggle to identify a compelling business case to compensate for the challenges of T+1. Currently, in the UK there are c.70% unmatched transactions on trade date and 10% of transactions are not settled after T+1. ISITC Europe’s research highlighted that T+1 is aiming to achieve three key outcomes: reduction of counterparty risk, reduce costs of collateral margin, and increase market liquidity. This will eventually force the capital market players to innovate and modernise systems used across the trade lifecycle.
For the international players, the discussion focused on four key impact areas.
- For European ETFs invested in the S&P it would mean that the ETF settles on T+2 but that the underlying securities will settle on T+1, which will create a misalignment in the settlement cycle.
- FX and prefunding will need to change, especially if firms do not operate an in-house treasury function.
- For securities lending, problems arise for lending of more illiquid securities and there is a potential for some firms to withdraw from lending stock, if the operational costs become too high.
- Finally, the system infrastructure will require a significant investment and adjustment to enable better straight through processing.
Many buy-side firms have not set budget aside this year to understand the impact of T+1 – they are waiting for more directions from leadership. However, our and the panellist’s recommendations to firms are:
- Don’t wait for regulatory change to assign budget. Commit capital and resources now.
- Communicate with the parties close to you and educate each other.
- Ask custodians or settlement agents questions about T+1.
- Talk to clients about T+1 to assess any problems.
- Analyse existing operations and processes for errors and delays and introduce safer STP processing.
There were discussions on the possibility of a phased transition by asset class, but it was generally agreed that the best approach would be all or nothing.
The briefing concluded with some closing remarks from Taruna Bhagtani (EY) and John Gavin (ISITC Europe) emphasizing that although there were still many open questions around the transition to T+1, but the Forums’ aim was to bring the industry together and make the transition as painless as possible. To help achieve this ISITC Europe has scheduled a series of ‘Accelerated Settlement Challenges’ roundtables to enable more in-depth discussions on specific areas of concern, namely:
- Settlement Initiation – 11/10/2023
- Treasury/FX/Prefunding – 01/11/2023
- Stock Borrowing/Lending & Collateral/Liquidity Management – 14/11/2023
- Data Challenges – 29/11/2023
If you are interested in participating in the first of the roundtables, click the links above to find out further information and request a place. (Please note places are limited and will be confirmed subject to availability)
Please note: Members can log in to find a more detailed report of this event in the Members Area of the website.
Further reading: Global research paper into operational, technology and business preparedness for T+1 settlement.