European and APAC firms that quickly prepare for the T+1 agreement in North America would gain a competitive advantage, writes Javier Hernani Burzaco.
According to a 2015 study by Microsoft and Time Magazine, human attention spans have dropped from 12 seconds to just 8.5 seconds over the past two decades, reflecting our growing need for speed in all aspects of life. It is no different in the area of post-trade. By May 2024, the Securities and Exchange Commission’s (SEC) long-awaited plan to shorten the securities settlement cycle to T+1 (trading plus one day) will be implemented.
While it is hoped that this will reduce settlement risk and improve efficiency, the path to this progress remains fraught with increasing practical challenges. With only a few months left until the changeover, it now casts a shadow of uncertainty about what positive impact it could have on market participants.
Beyond the USA
Domestically in the US, where the launch of T+1 will have the greatest impact given the size of America’s financial markets, operational hurdles remain to be overcome. US banks, custodians, asset managers and brokers are rethinking their internal processes to ensure they can meet the shortened settlement period. Many are looking to increase automation and implement APIs to modernize outdated back-office processes.
However, because the U.S. securities market has a global reach, it is critical to consider how the impending transition to T+1 in North America will impact other regions. For example, due to time zone restrictions, companies in APAC and Europe will have very little scope to resolve post-trade issues if settlement windows are halved. While the US began transitioning from T+2 to T+1 two years ago, most APAC and European countries have only just begun to discuss this transition in their own markets. As a result, there is a possibility of misalignment between different markets. But before we get to that, there is still a lot of work to be done to transition to T+1 in North America.
European financial institutions face an additional obstacle due to their significant US holdings. The Association for Financial Markets in Europe (AFME) highlighted the scale of the problem in some of its early research into T+1. According to the industry association, compressing a two-day settlement window into one day results in an 83% reduction in the time between trading and the start of the settlement process. European firms trading through U.S. markets effectively have to settle for seven or eight hours of settlement time to make up for the time zone difference. However, if you think this will be a challenge, you should consider companies operating in APAC.
The Asian dilemma
The original one-day settlement period is being shortened to a few hours for Asian companies, increasing pressure on operations teams. APAC market participants must confirm their securities and foreign exchange trades almost immediately, and exchanges of cash and securities must occur very soon after trades to meet the tighter settlement period.
Take Singapore for example. Due to its significant base of high net worth individuals, companies in this market are heavily dependent on the U.S. securities markets. It is expected that this will put them under enormous pressure. According to our latest global survey of market participants, 39% of respondents in Singapore expect an increase in failed settlements as a key consequence of the introduction of T+1 in the US.
Given this daunting challenge, market participants operating in the fragmented APAC markets cannot afford to remain passive – and many have no intention of doing so. Our survey shows that 42% and 34% of Singapore and Hong Kong-based companies, respectively, believe that doing nothing as T+1 rollout approaches in North America will only lead to greater operational complexity.
The benefits for those who prepare
Given this, there appears to be a clear need for market participants across the APAC region to carefully consider the impact of the transition to T+1 on their operations. To overcome this uphill battle, there appears to be an even greater need to act quickly by collaborating with custodians and multi-market support providers.
In addition to simply protecting companies from the risk of major settlement failures, this approach could also lead to the realization of greater post-trade efficiencies and cost savings. Already, almost half of respondents in Singapore and Hong Kong (48% and 47% respectively) see the transition to T+1 in the US as an opportunity to automate processes, increase efficiency and reduce costs.
As the countdown to T+1 in North America nears its end, it seems high time that financial institutions in Europe and APAC think carefully about what impact this could have. For those who act quickly, this could represent a unique opportunity to get ahead of the competition and gain an edge as the likelihood of a shorter settlement cycle becomes unavoidable in their own markets.
—
By Javier Hernani Burzaco, Head of Securities Services, SIX
European and APAC firms that quickly prepare for the T+1 agreement in North America would gain a competitive advantage, writes Javier Hernani Burzaco.
According to a 2015 study by Microsoft and Time Magazine, human attention spans have dropped from 12 seconds to just 8.5 seconds over the past two decades, reflecting our growing need for speed in all aspects of life. It is no different in the area of post-trade. By May 2024, the Securities and Exchange Commission’s (SEC) long-awaited plan to shorten the securities settlement cycle to T+1 (trading plus one day) will be implemented.
While it is hoped that this will reduce settlement risk and improve efficiency, the path to this progress remains fraught with increasing practical challenges. With only a few months left until the changeover, it now casts a shadow of uncertainty about what positive impact it could have on market participants.
Beyond the USA
Domestically in the US, where the launch of T+1 will have the greatest impact given the size of America’s financial markets, operational hurdles remain to be overcome. US banks, custodians, asset managers and brokers are rethinking their internal processes to ensure they can meet the shortened settlement period. Many are looking to increase automation and implement APIs to modernize outdated back-office processes.
However, because the U.S. securities market has a global reach, it is critical to consider how the impending transition to T+1 in North America will impact other regions. For example, due to time zone restrictions, companies in APAC and Europe will have very little scope to resolve post-trade issues if settlement windows are halved. While the US began transitioning from T+2 to T+1 two years ago, most APAC and European countries have only just begun to discuss this transition in their own markets. As a result, there is a possibility of misalignment between different markets. But before we get to that, there is still a lot of work to be done to transition to T+1 in North America.
European financial institutions face an additional obstacle due to their significant US holdings. The Association for Financial Markets in Europe (AFME) highlighted the scale of the problem in some of its early research into T+1. According to the industry association, compressing a two-day settlement window into one day results in an 83% reduction in the time between trading and the start of the settlement process. European firms trading through U.S. markets effectively have to settle for seven or eight hours of settlement time to make up for the time zone difference. However, if you think this will be a challenge, you should consider companies operating in APAC.
The Asian dilemma
The original one-day settlement period is being shortened to a few hours for Asian companies, increasing pressure on operations teams. APAC market participants must confirm their securities and foreign exchange trades almost immediately, and exchanges of cash and securities must occur very soon after trades to meet the tighter settlement period.
Take Singapore for example. Due to its significant base of high net worth individuals, companies in this market are heavily dependent on the U.S. securities markets. It is expected that this will put them under enormous pressure. According to our latest global survey of market participants, 39% of respondents in Singapore expect an increase in failed settlements as a key consequence of the introduction of T+1 in the US.
Given this daunting challenge, market participants operating in the fragmented APAC markets cannot afford to remain passive – and many have no intention of doing so. Our survey shows that 42% and 34% of Singapore and Hong Kong-based companies, respectively, believe that doing nothing as T+1 rollout approaches in North America will only lead to greater operational complexity.
The benefits for those who prepare
Given this, there appears to be a clear need for market participants across the APAC region to carefully consider the impact of the transition to T+1 on their operations. To overcome this uphill battle, there appears to be an even greater need to act quickly by collaborating with custodians and multi-market support providers.
In addition to simply protecting companies from the risk of major settlement failures, this approach could also lead to the realization of greater post-trade efficiencies and cost savings. Already, almost half of respondents in Singapore and Hong Kong (48% and 47% respectively) see the transition to T+1 in the US as an opportunity to automate processes, increase efficiency and reduce costs.
As the countdown to T+1 in North America nears its end, it seems high time that financial institutions in Europe and APAC think carefully about what impact this could have. For those who act quickly, this could represent a unique opportunity to get ahead of the competition and gain an edge as the likelihood of a shorter settlement cycle becomes unavoidable in their own markets.
—
By Javier Hernani Burzaco, Head of Securities Services, SIX
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