At a recent meeting organized by The Network Forum, panellists agreed that automation and straight through processing (STP) are critical enablers to advance accelerated settlement cycles.
Moderated by Nellie Dagdag, DTCC Managing Director for Marketing and Communications APAC, the panel featuring Magdalene Tay, APAC Head for Global Markets Management, BNY Mellon;
Pataravasee Suvarnsorn, Managing Director, Thailand Clearing House; Prashant Vagal, Executive Vice President, National Securities Depository Limited; and Whikie Liu, Director, Global Securities Exchange, SWIFT, discussed the change management involved when moving to T+1 settlement cycle in listed securities markets.
Related: How APAC Markets Can Learn from U.S T+1 Journey
Differing Drivers Across Markets
Dagdag and Vagal highlighted that the drivers for accelerating settlement cycles may differ across markets. For big markets like the U.S., reducing the settlement cycle by one business day will lower margin requirements and bring about greater market efficiencies.
The scenario is slightly different in India, where the main driver for the move to T+1 is its retail investor segment. Its huge pool of retail investors, which increased substantially during the pandemic, is continuously looking for opportunities to improve their return on investments – the faster their trades can settle, it will give investors more liquidity with the availability of funds and securities they trade. Domestic mechanisms including automation and STP have since evolved to support India’s retail market, enabling it to adopt T+1 settlement.
“The drivers for T+1 will also depend on market focus and infrastructure sophistication level. The added push in the U.S. essentially came from addressing market volatility and regulatory scrutiny. The ease of connectivity and cross-border linkages between the U.S. and Canada are added factors behind the planned transition to T+1,” explained Tay.
She continued, “In Asia, mitigating counterparty risks and improving settlement efficiencies are key considerations for a shorter settlement cycle while Europe is more concerned about establishing a common settlement standard for central securities depositories in the European Union – to avoid cash penalties to be incurred for settlement fails under the Settlement Discipline Regime of the Central Securities Depository Regulation.”
Impact on T+1
Dagdag commented, “To manage the time-zone impact in a compressed settlement cycle environment, some firms in the U.S. are moving their post-trade operations to the West Coast to allow more time for processing. For investors in Australia and North Asia, this time-zone move could work in their favor – their day will start just as the U.S. market closes. However, behavioral adjustment is needed – to prioritize the matching-allocation-confirmation of U.S. trades at the start of their day.”
She continued, “The top two challenges with India’s progressive migration to T+1 are the tight trade confirmation and affirmation cut-off window and availability of a liquid foreign exchange (FX) market. The latter was somewhat addressed with FX funding instructions now extended to 7:30 am, Indian Standard Time on T+1. As many Asian currencies are not included in the Continuous Linked Settlement (CLS) platform and not traded offshore, firms trading in T+1 Asian markets may face settlement issues due to lack of FX liquidity.”
On potential concern in Thailand, Suvarnsorn said, “Based on our experience with T+2, domestic market participants prefer an automated market-wide solution to enable STP of trades and settlement instructions between counterparties and local custodians for faster processing instead of implementing bespoke proprietary systems. This will ensure that counterparties in the post-trade settlement chain are able to communicate within a single platform to fix exception errors, reducing the need to establish links to interoperate with multiple proprietary systems.”
Citing the latest paper published by the Association for Financial Markets in Europe (AFME), T+1 Settlement in Europe: Potential Benefits and Challenges, Liu indicated it may be assumed that reducing the settlement cycle from two days to one day could slash post-trade processing time by 50%. Instead, AFME estimates an 83% reduction in processing timeframe where market participants may be shifting from 12 hours to 2 hours of post-trade operations time.
Automation Is Key
Outlining comments from the panel, Dagdag reiterated, “The industry needs to rely on automation and STP to enable a smooth transition to T+1. Certain behavioral and process changes are also required to complement automation. The industry also needs ample time to prepare for the transition, such as review existing processes, implement firm-level system and process changes, and testing, and implement industry-wide testing. This explains why the U.S. is providing a long runway for the planned move to T+1 in 2024.”
From the custody’s viewpoint, Tay emphasized that an automated global client support platform should be available to help clients address time-zone and trade exceptions concerns. As there is no room for error, there will be little time for manual intervention.
Related: Navigating Shifting Capital Market Landscapes
The End State
The panel agreed that it is too premature to consider a T+0 settlement cycle at this stage for listed securities as market readiness is paramount. Vagal opined, “Due to the inherent nature of the Indian market, Though Interoperability already exists between our two depositories, National Securities Depositories Ltd. (NSDL) and Central Securities Depositories Ltd. (CDSL), and two central counterparties, NSE Clearing and Indian Clearing Corporation, there are various technical permutations to address aside from FX considerations for T+0 to happen.”
Liu stated, “Moving to T+0 will require the industry to work together – leveraging technologies like artificial intelligence and machine learning to provide real-time updates and improve settlement efficiency. Additionally, there must be flexibility in designing the optimal settlement cycle for different business groups and asset classes.”
Specifically for Thailand, Suvarnsorn remarked, “A segment of small and medium-sized enterprises securities is now settling trades on T+0. This market segment is aimed for local retail investors. In the future when the market is ready, we may extend the same settlement model for institutional investing and hence move to T+0 settlement.”
Tay reiterated that automation is required to advance to the next level of shorter settlement cycle, particularly when tokenized securities are being evaluated. Tay put forward, “The industry must not only collaborate to initiate such a huge endeavor, T+0 settlement should also be supported by a central utility to connect to various core platforms and downstream applications. And from a global custodian perspective, we need a platform that is scalable, sustainable and can cater to different settlement cycles.”