Nellie Dagdag, DTCC Managing Director – Industry Relations, Asia Pacific
The harmonization of settlement cycles continues to build momentum as three APAC countries prepare to transition to a T+2 schedule in the coming months. Indonesia and Singapore will harmonize their settlement cycles with India, South Korea, Taiwan, Hong Kong, Australia and New Zealand in November and December, respectively, and Japan will do the same in July 2019.
Nellie Dagdag, DTCC Managing Director – Industry Relations, Asia Pacific, has had a front row seat to the move to shorter settlement cycles in her more than two decades of experience working in financial services in the region. Here, she shares with us her insights on how global firms are preparing for the transition to T+2 in APAC, including the role that automation and straight-through processing will play in supporting the move.
DC: How will a shorter settlement cycle in APAC impact investors in the U.S. and EMEA?
ND: The primary benefit of markets in the region moving to T+2 is the positive impact it will have in strengthening the financial system here by reducing risk and creating greater operational efficiencies. A shorter settlement cycle will give investors globally greater assurance when trading with counterparties in the region.
However, this will also mean that firms in the U.S. and EMEA will have less time to settle trades with Asian counterparties due to time zone differences and various levels of automation across APAC. This increases the potential for delayed or failed settlement. To address this challenge, trading parties must ensure that their post-trade systems and operations can meet tight settlement deadlines to minimize trade failure and operational risk.
DC: Do most Asian firms have automated processes to manage their cross-border trading activity?
ND: It varies across the region because countries are at different stages of market maturity. Some firms here have fully automated front-to-back platforms while others rely almost exclusively on manual processing like faxes and email to exchange information and reconcile their trading activity.
By and large, APAC’s emerging markets are largely manual in nature when it comes to cross-border settlement. As a result, they require manual touchpoints throughout the post-trade process, which can lead to human error, a higher cost per trade and greater exposure to delayed and failed settlement and counterparty risk. Without automation, operational risk is increased and meeting a shorter settlement cycle when processing cross-border trades can be challenging.
DC: Is there an emphasis on promoting greater automation in those markets?
ND: Absolutely. Market operators, industry players and regulators in the region are striving for greater coordination and alignment around the use of automation. Given the time zone differences, standardization and straight-through processing in institutional post-trade processing are significant enablers to ensure a successful migration to a shorter settlement cycle. More broadly, moving to T+2 essentially requires firms to make process and technology improvements to achieve operational efficiencies and reap the benefits of a harmonized, shortened settlement cycle.
DC: Since many APAC markets are already on T+2, local market players do not anticipate any processing or system issues, just mainly behavioral changes especially for investors outside of the region. What are some of the specific behavioral changes that must occur?
ND: One key behavioral shift is to be mindful that there is one less day to complete all the pre-settlement activities – matching, allocation, SSI enrichment, sending settlement notifications and exception management. Exception management is of concern because this generally entails manual intervention, which could mean that exception resolution for trades in T+3 markets could be assigned lower priority. As such, those trades need to be reclassified to a higher priority when a market cuts over from T+3 to T+2 to avoid fails.
A second matter of concern is the repercussion of failed settlements in Asian markets, both in terms of monetary penalty and reputational damage. Asian regulators, and by extension the market operators, take failed settlements very seriously. The shorter settlement cycle compresses the time needed for the global investor and his agents (broker and custodian) to fix a potential settlement failure.
DC: What are some of the key benefits of shortening the settlement cycle of the remaining APAC markets?
ND: The growing interconnectedness among capital markets within and between Asia, EMEA and the U.S., should push the remaining markets in APAC to move to T+2. Shortening the settlement cycle has many benefits including reduced exposure to credit, counterparty and operational risks, faster settlement of transactions, and improved efficiency for investors and market participants. The shorter settlement timeframe will also align markets moving to T+2 with the major markets in APAC and global markets that are currently on T+2, which leads to greater global settlement harmonization across jurisdictions and regions.
On a macro level, the migration from a T+3 to T+2 settlement cycle will minimize systemic risk in the financial system – decreased funding requirements and a reduction in pro-cyclical margin and liquidity challenges as a shortened settlement cycle frees up capital – increasing the ability to manage capital across the industry. This is especially crucial during periods of market volatility.
DC: What are some of the lessons learned from the U.S. transition to T+2 that were applied in APAC?
ND: The migration to T+2 in the U.S. offers a few key lessons, which can be applied in Asia, as settlement timelines are shortened.
First, there should be open dialogue between regulators, infrastructure providers and industry players to ensure every party is working towards a common goal, regardless of whether the move to T+2 is driven by the country’s regulators or the industry. Second, an initiative of this scale should have a clear champion. For the U.S. T+2 initiative – an industry-led endeavor – DTCC, SIFMA and ICI acted as champions.
Next, the move should be motivated and supported by a solid business case to secure buy-in and reduce resistance on the transition. Lastly, a thorough migration plan coupled with a clear communication strategy targeted across the industry and market players are critical success factors.