DTCC Connection

Oct 09, 2014 • DTCC Connection

Firms in Asia-Pacific Not Prepared For Move to T+2 for European Securities

by Joseph King

European Markets T+2

Twenty-six European markets moved to T+2 settlement on October 6, 2014, with a few additional markets expected to switch over at a later date.

October 6, 2014

Austria, Belgium, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Greece, Hungary, Iceland, Ireland, Italy, Lithuania, Luxembourg, Latvia, Malta, Netherlands, Norway, Poland, Portugal, Slovakia, Sweden, Switzerland, United Kingdom

November 2015 Spain (equities)
TBD Romania
Already on T+2 Bulgaria, Germany, Slovenia

As more than two dozen European markets moved to a shortened settlement cycle (T+2), a new study published by Celent found that over half of Asia-Pacific financial firms trading on European venues have not completed the changes necessary to adhere to the T+2 settlement cycle in Europe.

The study, “Europe T+2: Is Asia-Pacific Ready?” commissioned by Omgeo, provides insight into the level of readiness for the move to Europe T+2 among investment managers, broker/dealers and custodians in the four major Asia-Pacific markets (Australia, Singapore, Hong Kong and Japan).

The move to T+2 in Europe is driven, in part, by the upcoming 2015 implementation of Europe’s new Central Securities Depositories Regulation (CSDR) which mandates the introduction of a shortened settlement cycle. A secondary driver is regulator goals to create a more uniform marketplace, reduce settlement costs, facilitate cross-border trading across the European Union markets, increase operational efficiency and reduce counterparty settlement risk.

“By commissioning research like this, our aim is to create broader awareness of the important activities firms will need to make as markets move increasingly to a T+2 settlement cycle,” said Matthew Chan, Head of Asia Strategy at Omgeo. “Europe’s move to an accelerated settlement cycle is a precursor for changes taking shape in other key markets. Based on our interactions with regulators in various jurisdictions, industry associations and firms, we know that market participants are closely following the implementation of a shorter settlement cycle in Europe and the potential unintended consequences that may result.”

The survey’s findings include:

  • 58% of Asia-Pacific firms have yet to complete the needed changes to support T+2 settlement in Europe. Some firms will still be working on the improvements even after the cutover in October 2014, which could put them at risk in not meeting the shorter settlement deadlines.
  • While 80 – 90% of respondents intend to move to T+2 settlement, some firms in Asia-Pacific plan to stay on T+3 and rely on their brokers to fulfill the T+2 obligations on their behalf. Although this is causing some concern, it also presents a competitive opportunity for brokers with the appetite to take on this risk for their clients.
  • 73% of firms said they will change their processes to meet the T+2 requirements for Europe, while 64% of firms indicated they will need to upgrade their post-trade technology.
  • 18% of respondents plan to change their investment strategies in order to avoid the T+2 regime.
  • 34% of firms expect the process and technology costs for compliance with Europe T+2 will be less than $100,000 and 33% expect needed investments will be under $500,000. Large regional banks with a presence in Europe and global firms estimate their costs will exceed $2 million.
  • T+2 settlement in Europe is unlikely to be disruptive to the European investment activities of market participants in Asia-Pacific. Most see it as a surmountable challenge.

Although a number of markets worldwide are already on a T+2 settlement cycle, according to the study, in Asia-Pacific a shorter European settlement cycle will be particularly challenging due to operational complexities associated with time zone differences, noted Chan.

“For firms with significant European trading activity, automating processes is critical to meeting the T+2 deadline,” Chan said. “It is also important that firms match trades on local T+1, as the current T+3 buffer for managing mismatched trades will cease to exist within the new compressed cycle.”

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