Firms changing their technology in order to meet a shorter settlement cycle for US equities should take the opportunity to future-proof their systems for tokenization and digital assets.
In February 2022 the US Securities and Exchange Commission voted to shorten the settlement cycle for US equities from T+2, two business days after the trade date, to T+1.
Mack Gill, chief operating officer and board director of Torstone Technology, a post-trade technology company for financial markets, told Markets Media that his personal thesis is that the required transformation will result in a launch pad for a lot of fintech change.
“I am convinced of the convergence between T+1 and the increasing need for a digital asset strategy,” he said. “Everyone knows that over the next couple years they will need to handle some level of digital assets and there is no room for the status quo.”
Market participants have welcomed the move to T+1 which is designed to decrease credit, market, and liquidity risks. In August this year SIFMA, The Securities Industry and Financial Markets Association; ICI, the Investment Company Institute;, and DTCC, the US Depository Trust & Clearing Corporation published The T+1 Securities Settlement Industry Implementation Playbook which assumes a third quarter 2024 transition, subject to final regulatory approval from the SEC.
Gill said there has been a recent shift to September of 2024 and the long weekend of Labor Day.
“There will be a lot more debate on this through 2023 and whether the date needs to be pushed to 2025,” he added.
In order to meet the target of the third quarter of 2024, the industry will need to carry out parallel testing in the first of 2024. Therefore, firms will need to spend the beginning of 2023 reviewing their technology and making decisions on what needs to be changed.
Gill said: “Organizations need to hit the ground running in 2023. They need to carry out a wholesale review of their operational flow and underlying systems.”
One reason for a possible delay is that the change is bigger than most people realise as it affects more than just technology. Although T+1 shortens US equity settlement there will be an impact on many other areas including corporate actions, securities lending, cash management and collateral management.
In addition, Gill argued that mid-size and smaller organizations in the US still carry out a lot of manual processing in-house and will have the most need for change.
Overseas impact
Gill said there is also a growing realisation of the scale of the move to T+1, including outside North America.
“Everybody in Europe and Asia has North American exposure and flow,” he added. “This is a regulatory change with global impact.”
India has recently moved to T+1 while mainland China already operates on T+0 – but on a net basis, according to Gill. Once the US shortens its settlement cycle, many Asian businesses will have to pre-fund their trading due to the time difference which will need changes in their workflows.
Gill expects Asia and Europe to eventually follow the move to T+1, although Europe currently has other regulatory priorities such as CSDR, the Central Securities Depository Regulation. .
Virginie O’Shea, founder of Firebrand Research, said in a report that there was discussion of the European perspective on T+1 settlement at the Sibos conference in Amsterdam this month.
“On the topic of T+1, panellists indicated that Europe is currently dealing with a higher than usual number of settlement fails and penalties related to the implementation of the last leg of CSDR,” she added. “The discussion around a future move to T+1 or even beyond therefore hasn’t been at the forefront of people’s minds, though some work has been done by AFME [Association for Financial Markets in Europe] to scope out the challenges ahead.”
Real-time settlement
Although settlement is moving to T+1, the ultimate direction of travel is towards real-time settlement according to Gill.
“Real-time processing and automation is the Holy Grail,” Gill added. “That’s where you want to be.”
He argued that if firms just tweak their current batch processing for T+1, they are likely to have higher failed trades which results in higher operational costs, as well as penalties, and will also lose market share.
“The return on investment over the next 10 years is going to be massive,” said Gill. “There is going to be a shakeout in the industry which dovetails with the opportunity in digital assets and tokenization.”
