European and APAC firms that act quickly to prepare for T+1 settlement in North America would gain a competitive advantage, writes Javier Hernani Burzaco.
Over the past two decades humans’ attention spans have dwindled from 12 seconds to a mere 8.5, according to a study conducted by Microsoft and Time Magazine back in 2015, reflecting our growing need for speed in all aspects of life. The realm of post-trade is no different. By May 2024, the Securities and Exchange Commission’s (SEC) long-anticipated plan to shorten the securities settlement cycle to T+1 (trade plus one day) will be implemented.
While it is hoped this will reduce settlement risk and improve efficiency, the road to this advancement remains fraught with mounting practical challenges. With only months to go until the transition, these are now casting a shadow of uncertainty over the positive impact it might have for market participants.
Beyond the US
Domestically in the US, where the introduction of T+1 will have the greatest impact given the size of America’s financial markets, there remain operational hurdles to overcome. US banks, custodians, asset managers and brokers are reevaluating their internal processes to ensure they can meet the shortened settlement timeline. Many are subsequently looking to increase automation and implement APIs to modernise outdated back-office procedures.
However, the US securities market has global reach, and so it is crucial to consider how the fast-approaching transition to T+1 in North America will impact other regions. Due to time zone constraints, for instance, firms in APAC and Europe will have very little room to iron out post-trade issues when settlement windows are halved. Moreover, while the US embarked on the transition from T+2 to T+1 two years ago, most APAC and European countries have only just begun discussing this transition in their own markets. As a result, there is potential for a misalignment between different markets. But before we get to that, there is a lot of work to do for the move to T+1 in North America.
European financial institutions face an added obstacle due to their significant US holdings. The Association for Financial Markets in Europe (AFME) highlighted in some of its early research into T+1 the magnitude of the issue. According to the industry body, compressing a two-day settlement window into one day results in an 83% reduction in the time between trading and the start of the settlement process. European firms trading through US markets will effectively have to make do with a seven or eight-hour settlement timeline to accommodate the time zone difference. But if you think that will be a challenge, consider firms operating in APAC.
The Asian dilemma
What is meant to be a one-day settlement period will be reduced to just a few hours for Asian firms, piling the pressure on operations teams. APAC market participants will have to confirm their securities and FX trades almost instantaneously, and the exchange of cash and securities will have to take place very shortly after the trade to meet the tighter settlement timeframe.
Take Singapore, for example. Given its substantial base of high-net-worth individuals, firms in this market are significantly exposed to US securities markets. It is anticipated this will put them under immense pressure. According to our recent global survey of market participants, 39% of respondents in Singapore foresee a higher rate of settlement fails as a main consequence of the implementation of T+1 in the US.
In the face of this daunting challenge, market participants with operations tied up in APAC’s fragmented markets cannot afford to remain passive – and many do not intend to. Our survey suggests 42% and 34% of firms based in Singapore and Hong Kong, respectively, agree that sitting idly by as T+1’s inauguration in North America approaches will only lead to greater operational complexity.
The benefits for those who prepare
With this in mind, there appears a clear need for market participants across the APAC region to carefully assess the impact of the shift to T+1 on their operations. There seems an even greater need to take prompt action by collaborating with custodians and multi-market support providers to navigate this uphill battle.
Beyond simply insulating firms against the risk of greater settlement fails, taking the approach could result in the realisation of greater post-trade efficiencies and cost savings. Already, nearly half of respondents in both Singapore and Hong Kong (48% and 47%, respectively), view the US transition to T+1 as an opportunity to automate processes, enhance efficiency and cut costs.
With the countdown to T+1 in the North America nearing its end, it seems high time financial institutions in Europe and APAC thought carefully about what its implications might be. For those that act quickly, it could pose a unique opportunity to gain the edge over the competition and give themselves a head start as the likelihood of a shorter settlement cycle in their own markets becomes unavoidable.
By Javier Hernani Burzaco, Head of Securities Services, SIX