T+1 settlement in the UK/Europe straightforward ?
As you may have seen, in the US the SEC has recently voted to propose rule changes including moving to a T+1 settlement cycle for most broker-dealer transactions in securities. The SEC says: “The proposed changes are designed to reduce the credit, market, and liquidity risks in securities transactions faced by market participants and U.S. investors”. Whilst those in the wholesale post-trade world understand what the benefits of moving to T+1 are, a large swathe of retail investors have recently also been exposed to the downside of longer settlement cycles through the “meme stock” events leading to Robinhood and other brokers restricting trading in several securities (GameStop being one of them) in January last year.
Possibly more interesting however is that the SEC are also consulting on moving to T+0 settlement; moving from T+1 to T+0 is a much more impactful change compared to the move from T+2 to T+1. This is because it effectively leaves no “wriggle-room” for adjustments to trade and settlement details to happen on T+1, and effectively forces much of what happens ‘post-trade’ to take place ‘pre-trade’. This is especially relevant in US securities transactions with counterparties based in Asia where there is no intra-day overlap to resolve issues. Further, depending on the specifics of the settlement process, potential netting opportunities for settlement may be reduced which may create funding and credit issues.
Many firms have already invested in making their settlement infrastructure more flexible as part of the move from T+3 to T+2 (in Europe and the US), and would claim that moving to T+1 should be conceptually straightforward. In Europe, the trade organisation ISITC Europe has kicked off an industry survey (Click here to go to the survey) to take a pulse on its members’ views on challenges and benefits that they see in these proposals – results should be published in March.
As industry experts look forward, the types of changes that shortening settlement cycles create are a pre-cursor to what a DLT-based “future-state” infrastructure would require. In these models, “T+0” is not delineated in days, it is actual simultaneous execution and settlement of a transaction. The change in operating model to achieve this is substantial – failure (in the traditional sense) is not an option, lack of the required preparation results in non-execution. How the industry copes with this is yet to be fully fleshed out.