On September 2017, the U.S. securities market along with Canada, Mexico, Peru and Argentina shortened their settlement cycles from T+3 to T+2. Though many Asia Pacific markets have already transitioned to T+2 including India, South Korea, Taiwan, Hong Kong, Australia and New Zealand, and with China on a T+0 cycle, it is widely expected that the remaining Asia Pacific markets will transition to a shortened settlement cycle to align with 90% of the global markets.
To date, Japan and Thailand have announced plans to move to T+2, Q2 2019 (tentatively) and March 2018 respectively, while Singapore is expected to announce its target date soon. In Japan, Thailand and Singapore, each had market developments that were more pressing than T+2 and, as a result, were given a higher priority including Japan’s transition to ISO20022 and Singapore’s focus on implementing an API-based clearing system interface. APAC markets had indicated they will move to a shortened settlement cycle after the U.S. has moved to T+2 and these remaining markets are expected to progress with the shortened settlement initiative in the near term.
Are the Remaining APAC Markets Ready for T+2?
It seems rational that the other remaining markets in Asia would seek to shorten their settlement cycles. For purely domestic markets, the move is quite feasible. However, when it comes to markets that are global in nature, processes are more complicated. For cross-border transactions, where many intermediaries are involved, coupled with time zone constraints and multi-currency funding, a shortened settlement period may be quite challenging.
For the remaining Asia Pacific markets to transition to a shortened cycle, factors such as automation and straight-through processing also comes to play. A study by Andersen Consulting (now Accenture), commissioned by The Depository Trust & Clearing Corporation (DTCC) almost 20 years ago, identified the building blocks critical to the U.S. market in a shortened settlement cycle environment, including required changes to regulation, information technology, organizations internal processes and procedures.
DTCC has long been in the forefront of the movement to shorten settlement cycles because of its benefits to the industry including reduced counterparty risk, decreased clearing capital requirements and increased global settlement harmonization. DTCC, its clients and the industry at large, have since implemented many of the building blocks identified by the Andersen Consulting study. In 2014, DTCC collaborated with SIFMA, the ICI and market participants to establish a steering committee to provide the guidance, direction and support needed for the U.S. to move to a T+2 settlement cycle. While the move in the U.S. to T+2 was a success, there were a number of lessons that could be applied in any new market looking to shorten the settlement cycle.
Top 5 Lessons Learned
1. It is critically important to have an open dialogue between regulators, infrastructure providers and industry players to ensure everyone is on the same page and working towards a common goal, whether the T+2 move is a regulatory mandate or industry-led.
2. A major initiative can also benefit by having a clear champion. For the U.S. T+2 initiative – an industry-led endeavor – the champions were DTCC along with industry organizations SIFMA and ICI. If the move is mandated by regulation, the champion would likely be the designated government agency.
3. It is important that the move is supported by a solid business case to rally support and reduce resistance towards the transition. The business case should highlight the cost savings, risk reductions and the estimated spend for the industry. Based on estimates done early this year, the U.S. T+2 move is projected to reduce the clearing fund contribution of National Securities Clearing Corporation (NSCC) members by USD 1.36 billion.
4. Leveraging subject matter experts (SME) and consultants is pressing for big initiatives such as shortening a settlement cycle. For example, the U.S. T+2 move involved more than 600 SMEs who worked together to ensure legal, regulatory, technology, process and change management areas were effectively addressed.
5. Thorough planning down to the minute of all details and a clear communication plan across the industry and market players are critical. The UST2 website and T+2 command center are good examples of these points.
Shortening the settlement cycle of the remaining Asia Pacific markets could substantially reduce operational and systemic risks across the industry, allow investors to receive settlement faster and align with other key markets across the world.
Preparation is critical in any transition. Moving to a T+2 cycle for the remaining APAC markets takes more than thorough planning to be successful. Having an open dialogue, an initiative champion, a solid business case, a strong arsenal of SMEs and a well-planned communication plan are significant enablers for a successful T+2 transition in any remaining market.