Both the UK and the EU have begun task forces to discuss the implications of moving to T+1 in their respective regions, with the UK scheduled to present its findings ahead of schedule. But before a move to T+1 can be considered, the region’s efficiency issues need to be addressed.
Related: What U.S. T+1 means for firms across Asia and Europe
DTCC’s Matt Johnson, Director, ITP Industry Relations and Strategic Initiatives, and Jan Coughlan, Director, Product Management, joined a panel of post-trade experts that included Emma Johnson, Executive Director, Securities Services Global Custody Industry Development, J.P. Morgan, Sachin Mohindra, Executive Director, Global Banking and Markets, Goldman Sachs, Peter Tomlinson, Director, Post Trade and Prime Services, AFME, and Rollo Burgess, Director, Consulting - Capital Markets, Deloitte to discuss advancing settlement in the EU and the UK.
Please read below for highlights from the panel:
The Importance of Settlement Efficiency
Settlement efficiency is a priority in the EU but moving to T+1 will take more work to achieve than in the U.S. given the complexity and fragmentation of the European markets. As policymakers look into a shorter settlement cycle, the benefits include both investing and modernizing the technology behind securities infrastructure, improving efficiency and reducing costs. What’s more, the current interest rate environment is only adding to industry cost pressures. Reducing trade fails provides market participants with a financial incentive to address these challenges.
Settlement efficiency is a central topic of discussion in European markets with the recent implementation of the CSDR settlement discipline regime. Cash penalties are being imposed to improve efficiency, while the hotly contested mandatory buy-in remains off the table — for now. In the almost two years since the settlement discipline regime began, fail rates for equities have dropped but not as much as anticipated, while fixed income fail rates have actually increased.
Solutions to Increase Settlement Efficiency and Reduce Settlement Fails
The lack of standards in the settlement process, particularly among manual clients, has added to errors and risks. Standardization is needed to improve efficiency and SSIs play a decisive role in trade lifecycle and efficiency. European market structures are inherently complex, as settlement can occur in several CSDs and across borders and jurisdictions.
Related: DTCC CEO discusses the dynamics of accelerating settlement
Regulation as Innovation
Are regulatory mandates needed in order to move to accelerated settlement? To prepare for the move in the U.S., the Securities and Exchange Commission (SEC) is requiring allocation, confirmation and affirmation to occur on T0. Panelists agreed that a partnership between regulators and market participants would help to get everyone on the same page.
The industry continues to look for an environment that optimizes the facilitation of settlements to find common ground and can help the EU find a place of better settlement efficiency.
Preparing for Accelerated Settlement in the UK and EU
Trade group AFME and consulting group Deloitte have been working with numerous industry participants, including DTCC, to compile information from the industry to connect the dots across the post-trade lifecycle.
Hinting at some of their findings, panelists discussed that markets have a significant opportunity to improve settlement efficiency and one of the key drivers is standing settlement instructions, or SSIs. A reduction in manual processing is critical to any move to accelerated settlement. However, the ability to automate is challenging, given many firms still communicate SSIs manually. ALERT is the gold standard of SSIs, providing much-needed standardization.
To move the industry forward, DTCC is increasing its Global Custodian (GC) footprint by not only adding custodians but also partnering with existing GCs to extend SSI coverage.