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US Next-Day Settlement: The Clock Ticks Closer to T+1 for Europe and the UK
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Almost a decade ago, Europe led the way in shortening the settlement cycle to T+2 – a task that required wholesale re-engineering of European market-structure. Mere months from now, European securities firms will again be challenged – this time with the move to US NEXT-DAY settlement. Once more, our market participants face a complete restructuring of entire organisational workflows.
The 2014 effort went smoothly, thanks to excellent industry preparation. But with approximately one year remaining to accomplish next year’s requirements, it is crucial that Europe handles the T+1 adoption appropriately. Unfortunately, many firms are still getting their arms around key considerations they must address, if T+1 is to be just as successful.
The big question
As the SEC shortens the cycle for standard settlement in the US, most securities transactions will be moving from two business days (T+2) to one business day (T+1). This new rule will take effect in North America on 28th May 2024.
With the clock ticking, (refer to my colleague’s blog), the big question becomes: are European and UK financial firms properly adjusting their operating models?
Because whether they like it or not, every market participant is facing a slew of changes necessary to enable US T+1 by next summer.
The complexity of Europe
Nearly 10 years have passed since 6th October 2014, when T+2 settlement went live. Much has changed over that time. With Brexit having altered the geo-political landscape, there is now something of a competition between UK and European market centres. Against this backdrop, the US has taken the lead in this next marketplace evolution.
The key aims of US T+1 settlement are three-fold:
- more efficient trading for U.S. market participants
- increased liquidity and
- reduced market risk.
It is expected that the UK and Europe will follow suit with the new settlement cycle likely 12 months after the US. But the truth is that Europe and the UK have a significantly more complex market infrastructure. The transition is a heavier burden on this side of the Atlantic, with 14 currencies, 18 CCPs, 31CSDs and 25 Exchanges. Massive changes to the current post-trading operating models will be needed. To assess this, AFME has established a task force, whose initial report is expected by the end of 2023.However, regardless of when Europe and the UK adopt this change, the US T+1 move will have an immediate impact on every market participant trading in US securities. Indeed, many of the large European and UK firms have already started working to re-engineer their operating models. This effort has benefited greatly from the ground work done for CSDR (Central Securities Depository Regulation). Depending on the firm, there are various states of preparation now beginning to be implemented.
However, it is the buy-side firms which are expected to struggle the most with accommodating a faster settlement cycle. Many of the buy-side firms face unique challenges adapting their critical internal infrastructure by changing multiple systems simultaneously. This includes upgrading their trading and settlement processes; implementing a “follow the sun” model; aligning more closely with their custodians and ensuring real time communication internally. With less time in the entire process now, that last piece becomes the most important component.
As pressure mounts, some market players have criticised the regulators for a lack of clarity in all this. Many companies feel they are scrambling to understand what exactly is needed for them to safely meet the May 2024 go-live date. As such, Securities Services and custodians have been stepping in and educating their clients on the potential impact the US T+1 may have on their business. They are helping to provide the steps needed for firms to become compliant with the shorter cycle.
The 3 key elements
With T+1 rapidly approaching, the most immediate changes relate to
- the confirmation process
- the allocation procedure and
- the affirmation time.
Addressing these 3 key elements becomes even more critical for any buy-side firm delegating their middle-office function to an outsourced provider.
Critical processes that will be impacted include:
- securities lending
- corporate actions
- collateral securities substitution and
- FX trading/cross-currency transactions
Custodians will play a pivotal role in reducing risk, especially with regards to settlement fails in the FX world.
To make this all possible, communication must happen in real-time. Because that is the only way that any firm can respond quickly to risk situations. Interoperability between systems is critical to reduce context switching and therefore speed processes and reduce errors. The move from T+2 to T+1 means a proactive response must now happen as close as possible to execution time.
Recognizing how critical timing has become, Symphony has created several solutions to help firms adapt to this new environment.
With time being critical, there should be no need to keep switching between each and every system on your desk. This means things like:
- Order-management systems
- client portals
- email inboxes
- break-monitoring systems and
- chat groups
All of these eat up your precious minutes. But this is no longer needed.
Your workflow can be made seamless with our Embedded Collaboration Platform. ECP enables Symphony clients to access their chats anywhere…and have all their systems at their fingertips. With this faster workflow, you can get to solving problems straightaway.
There are no more delays in switching between applications. Frankly, there is no time for any of this, in a T+1 world.
Find who you need
When your firm is exposed to potential risk, you need to get to the right person, or relevant group, the first time. You can’t afford to be passed around through colleagues and co-workers, while time slips away.
That is the value of having a verified and trusted directory.
This is precisely what Symphony delivers through Enhanced Directory. Through our technology, you can locate who you need immediately, without all the guessing and hoping. When there’s only one day to resolve your post-trade issues, having this level of targeted connectivity becomes priceless.
Accelerated settlement means you should be discussing resolutions, the minute you become aware of a problem. Because when it’s T+1-related, you simply don’t have time for the back-and-forth of email. Or even chat messages. In an urgent moment, an immediate voice conversation becomes necessary.
That is why Symphony provides Instant Voice.
Your ability to have immediate discussion at any time, ties your whole team together – regardless of where team members are physically located. Virtual offices and remote work locations are no longer a factor, when you have seamless and instant communication.
Tying it all together
Symphony doesn’t just tie people together. We also tie your systems together.
Through our network of APIs and our growing suite of available technology tools, we enable smooth integration of all your various platforms. Whether proprietary in-house setups or external 3rd-party vendors, we bring all your tools into the same ecosystem.
This interoperability enables seamless collaboration, faster reaction time and reliability – regardless of your current tech-stack.
The world is now moving faster than ever. For the financial world, that means literally. With approximately a year until T+1 settlement in the US, all UK and European firms are facing a monumental task. To be fair, APAC may face the greatest challenge of all the trading regions and we will explore that in the weeks ahead.
Right now, Europe and the UK must start to get in motion. All market participants here should begin making the necessary changes to accommodate a shorter settlement cycle. Just as before, proper planning and preparation will lay the foundation for our regional success. Such a massive transition will require the alignment of people and technology.
Symphony will help enable both.
Interested to see these solutions in action? Contact us for a demo.
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