Industry veteran Tony Freeman discusses how a move to one-day settlement in the US will impact investors in Asia.
There’s a well-known aphorism in politics: “Never let a good crisis go to waste.”
The GameStop debacle is a near-perfect example. The operational problems caused by the imposition of increased margin did not prompt the DTCC to announce its intention to move to T+1 settlement – the plan had been in the works for many months – but the comments by RobinHood management certainly gave the subject a favourable tailwind.
Vlad Tenev, Robinhood CEO, said in a blog: “There is no reason why the greatest financial system the world has ever seen cannot settle trades in real-time. Doing so would greatly mitigate the risk that such processing poses.”
Well, he doesn’t seem to have many supporters. Almost all commentators, including the DTCC, have said that real-time settlement is both impractical and would likely have some unwelcome side-effects.
For RobinHood and its clients, the most pressing impact would be a very severe restriction on the ability to trade. If you have to have a settled position in your account before you can sell, or a pot of cash to pay for a purchase, your ability to trade will be vastly reduced. Retail market platforms like Robinhood probably wouldn’t be viable.
The next best improvement, therefore, is to move equity and fixed-income markets to a one-day settlement cycle. So, is T+1 viable, and would it bring noticeable benefit? Yes, and yes.
In 2012, Europe mandated a T+2 settlement cycle, bringing it into line with most Asian markets. By 2017, almost all markets globally, including the US, had followed suit.
US market analysis in 2014 actually looked at both T+1 and T+2. The conclusion was that T+1 was too ambitious despite the clear benefits. In a market that was still recovering from the financial crisis, the multi-year payback was also a problem.
T+1 isn’t a done deal. There’s a lot of analysis to do but let’s presume it does happen in 2023 or 2024 – probably both in the US and Europe. How does this impact Asia? I think there are three aspects:
- Operational complexity: the mechanics of instructing an order, confirming and allocating the trade, and instructing settlement will all be squeezed into a much-reduced timetable. With a 12-hour time difference between the US and Asian markets, all processes will need to be real-time and work on a near 24-hour basis.
- Foreign exchange settlement cycles: For an investor based in Asia, most US trades will require a back-to-back FX transaction. The FX market still largely works on a T+2 settlement cycle, meaning that a one-day disconnect will exist between a securities trade and its FX component. This will increase operational complexity and costs.
- Market perception of risk and efficiency: Exchanges and market-infrastructures in Indo-Pacific led the world in adopting shorter settlement cycles. Having been in the vanguard they won’t want to be seen as being riskier or less efficient than their peer group. Local implementation of T+1 will inevitably be looked at.
Many of us have seen this movie before. But that doesn’t mean we know the ending. A two-year timeframe is a very short time in the land of market infrastructures – so the debate needs to start now.
Tony Freeman is a freelance communications consultant. He spent more than 30 years working in the City of London. He worked at Omgeo & DTCC from 2004-2020. He focuses on financial technology and operations.