I had the opportunity to join a panel of industry participants to discuss Settlement Cycle Optimization in Asia Post T+1 at The Network Forum in Asia in November. While the dust has already settled on T+1 in the U.S., the focus and intensity on accelerated settlement continue to pick up as other markets assess their transition to a shorter settlement cycle timeline. Sharing our collective experiences with T+1, my fellow panelists and I highlighted best practices, critical considerations and key learnings for firms navigating accelerated settlement beyond the U.S.
Related: Shortening the Settlement Cycle
Joining me on the panel were moderator Whikie Liu, Director, Global Securities Strategy, Swift; Lisa Briggs, Senior Manager, Equities, Securities & Payments, ASX Limited; Magdalene Tay, APAC ME Lead for Global Network Management, BNY; and Rana Usman, Senior Vice President, NSE Clearing.
Below is a recap of what I shared during the panel discussion:
Regulatory and Operational Impacts
Where the move to T+1 is a regulatory mandate, it is essential to accurately interpret the compliance obligations and the operational demands early to secure resources and budget for the transition. This will ensure matching, allocations, and confirmations with counterparties are completed ahead of schedule for settlement.
Increasing headcount and relying on manual processing, even for parts of the matching-allocation-confirmation chain, is not a workable solution in a condensed settlement cycle environment. This approach is unsustainable. Post-trade processing in a T+1 environment demands a scalable platform with streamlined, automated processes for efficient operations.
Managing Time Differences
Despite the time gap between Asia and the U.S., we would think that the time difference will create problems given that Asia is the furthest away from the nerve center. However, the cut-off time for affirming U.S. trades benefits some countries in Asia, enabling firms to efficiently process their trades during the local morning hours. In the Asian context, affirmation is the pre-settlement matching process between the local broker and the local custodian acting on behalf of the buy-side firms.
That said, the time-zone challenge can be more critical in European countries like Italy, where there may be labor rules that prohibit firms from requiring staff to work extended hours to process trades or fix issues. In countries where there are strict labor laws on working hours, implementing increased automation to enable auto-affirmation or trade confirmation will help solve the time-zone issue. The traditional follow-the sun operating model is another popular option for firms with global footprints.
Unique T+1 Expectations
Unlike the transition to T+2 in 2017, the shift to T+1 requires technological and behavioral changes to ensure success. While it is adequate to outsource the post-trade processing function to third-party providers when moving to T+2, in a time-sensitive T+1 structure, third-party vendors must be technologically equipped and adopt behavioral adjustments – including a thorough understanding of the operational and regulatory obligations – to ensure settlement compliance. Asset managers, who in a T+2 environment outsourced certain post trade functions to third parties, may also need education on certain processes which have become unfamiliar to them – as we saw in Asia with the U.S. move to T+1.
Processing Foreign Exchange Trades
Moving to T+1 settlement requires foreign exchange (FX) trades to be completed on trade date (T+0) or in the early morning of T+1. Processing FX will continue to be a challenge for cross border trades if firms do not explore automated solutions to help accelerate the FX lifecycle to meet the Continuous Linked Settlement deadline or their custodian cut-off times. Pre-funding of FX trades is another alternative that some firms chose when trading with U.S. counterparties – not an ideal solution given the cost implications.
Industry-Wide Testing
Industry testing is another critical success factor. In the U.S. transition, DTCC, the country’s premier financial market infrastructure, conducted nine months of industry-wide testing to facilitate T+1 readiness using different scenarios including double settlement days and production processing during public holidays. Thanks to DTCC’s provision of unlimited testing cycles, firms were able to fine-tune and validate their operational performance before implementation date.
Engaging With the Industry
Industry-wide engagement is crucial for a successful transition to T+1, given the scale, scope, and depth of this change in market structure. Because the change affects liquidity, collateral usage, post-trade, and settlement processing, it is also important to ensure that the smallest to the largest firms are ready to operate under a shorter settlement cycle.
Based on learnings from the U.S. experience, the move to T+1 reinforced the need for financial market infrastructures and industry associations to come together to provide ongoing education to support the local market in its transition. The engagement plan could range from direct outreach, T+1 readiness webinars and events to communications to provide resources on best practices, white papers, playbooks and other materials developed for different market segments.
Streamlining Operations
The value of automation is not limited to accelerated settlement. It revolutionizes post-trade operations by increasing speed, efficiency, scalability, and transparency. By streamlining and automating processes today, we can mitigate operational risk and better prepare for global accelerated settlement relieving us of the operational challenges associated with shorter settlement cycles.