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On February 15, 2023, the SEC adopted final requirements for a May 28, 2024, implementation date for the move to T+1 settlement for transactions in US cash equities, corporate debt, and unit investment trusts. Shortening the settlement cycle is a way to remove some risk from the markets, according to the SEC.
However, while the US and Canada are moving in lockstep with the SEC’s ambitious implementation date, there is still a huge amount of uncertainty for international markets, according to Brian Collings, CEO, Torstone Technology.
“The ramifications for the move to a T+1 settlement cycle cannot be overstated – this is a momentous move for global markets,” he stressed.
“Global capital markets are just that: global. Investment flows may be negatively impacted by the move to T+1 as firms rush to meet the deadline, with operations systems and processes desperately in need of modernisation and automation,” said Collings.
He further said that global coordination is emerging as a key pain point for international market participants.
Time zone challenges are front of mind for many firms, with some US firms already making moves to accommodate time zones, he said.
Within this, issues such as pre-funding, foreign exchange and liquidity management will need to be carefully considered as North America makes the move to T+1, according to Collings.
“However mid-tier and smaller internationally-focused firms are concerned about losing business if they cannot quickly accommodate the changes,” he argued.
Jeffrey O’Connor, Head of Market Structure, Americas, at Liquidnet, agreed, saying that the new settlement cycle rule will cause significant complications for international traders.
There are a number of issues and questions that need to be answered because typically, international accounts don’t allocate until T+1 – delaying allocation, matching, and getting set up, he explained.
According to O’Connor, questions that will need to be answered include:
- Do ops get moved from executing region to local? So if they allocate 2am local, are they waiting until 8am our time for allocation execution?
- Is moving more clients to CTM the answer? A move to FIX allocations via Tag1?
- Does every client need an omnibus account?
When asked how will the rule impact the relationship with other markets which don’t operate in T+1, O’Connor said: “If the goal is to reduce risk, the ultimate move is to T+0.”
“We think it may be interesting to see how reduced settlement impacts the swap market, where the goal is to have the broker/dealer carry the risk to execute on a strategy,” he added.
But from a fund management perspective, the risk with brokers will certainly be reduced, possibly denting what is a very sizeable swaps market currently, he added.
Meanwhile, Collings said that a recent webinar Torstone Technology conducted in partnership with Firebrand Research highlighted some key impacts of the move to a shortened settlement cycle in the US for UK and international markets.
Participants from the custodian community observed that there have been noteworthy efforts in the US to address time zone challenges, he said.
As a result, some smaller firms have felt compelled to relocate or contemplate relocating their operational hubs to the West Coast in order to provide better service to their Asia Pacific clients, he added.
Additionally, some firms are exploring the possibility of extending their operating hours, especially if they do not already have a “follow-the-sun” model, Collings said.
He said that operational and technological issues such as manual processes and lack of automation must be addressed as soon as possible to facilitate the US move to T+1, which in turn will help the global industry move towards potential domestic moves elsewhere.
“However, amidst the challenges lies a silver lining. This move presents an opportunity for firms to revamp their operational efficiency and reduce risk,” he said.
“The key is to embrace automation and digital transformation, which can enhance middle- and back-office systems and give firms a much-needed competitive edge,” he said.
Laurence Jones, Americas regional director at FIX Trading Community, added that much of the activity between execution and final settlement involves manual tasks, and so meeting these deadlines could present significant challenges without introducing increased levels of automation or adopting market standards.
He noted that the FIX Protocol is already widely used to provide real-time messaging between institutional firms for much of their post-trade workflow and is therefore well placed to help firms meet the demands of processing speed and accuracy that T+1 settlement requires.
As discussions evolve and these regulatory frameworks are put in place, FIX Trading Community participants continue to work closely with other industry bodies, helping to define best practices for the industry, he said.
According to Jones, more recently, work has been undertaken to create workflows and messages to communicate real-time settlement status information for both cash and securities.
“This work is expected to conclude in Q2 2023 and will directly assist with T+1 implementation by facilitating the communication of settlement status information across all interested parties,” he said.
