SIONIC: now is the time for accelerating the settlement cycle
06 May 2021 UK
Image: Dmytro/adobe.stock.com
The time is now for accelerating the settlement cycle, according to SIONIC, a global consulting firm specialising in financial services.
While every country has its own settlement cycle, most countries operate on T+2 or two business days after the transaction date.
Recently, the Depository Trust & Clearing Corporation (DTCC) collaborated with the Securities Industry and Financial Markets Association (SIFMA), and the Investment Company Institute (ICI) to accelerate the move of the US securities settlement cycle to T+1.
The organisations believe moving from T+2 to T+1 will benefit investors and market participant firms by reducing systemic and operational risks.
In its new whitepaper, SIONIC highlights that legacy mainframe-based infrastructures, green screens, manual workarounds and duplicative processing are still very much alive in the back offices of some of the largest global banks and in many small regional fully disclosed brokerage firms.
SIONIC says that for far too long, the operational infrastructures at these firms have been underfunded and underappreciated.
According to the firm, the result of this underinvestment is that today’s back-office processes are operationally inefficient, and it is these inefficiencies that present the primary roadblock to shortening the current T+2 settlement cycle.
SIONIC suggests time will be in short supply for firms unprepared for the future.
Inefficiencies in operational processing and collateral management platforms are necessitating that brokers infuse more and more capital into their firms to meet the growing margin requirements from clearing corporations, SIONIC explains in the whitepaper.
SIONIC argues that many of these firms lack the capability and capacity to operate under a shortened settlement cycle because their legacy internal business processes have not kept up with the changing market and evolving institutional trading paradigm.
The primary goal of the operations team is to ensure the settlement process doesn’t adversely impact the trading process.
Without real changes to internal day-to-day processes, meeting these shortened settlement cycles in a timely fashion will be a significant challenge.
The paper notes that the current two-day settlement cycle has a negative impact on clearing fund requirements.
This is because it is calculated based on the aggregate notional value of all the unsettled transactions in a member’s account at any given point in, again, time, SIONIC affirms.
“Given the fact that there are still only 24 hours in each day with no increase in sight, financial services firms must become more efficient to meet the proposed shortened settlement timelines in a T+1 environment,” SIONIC cites.
While there are many operational processing and collateral management systems available that can be utilised in a shortened settlement cycle, SIONIC states that without both business process and behavioural changes being implemented, firms will struggle with the decreased time available to process their settlement activity.
In terms of where the issues with shortening the cycle lie, the paper suggests it is a business process issue more than a technology advancement issue.
The proprietary technology developed by individual firms along with today’s vendor solutions can support the move to T+1.
However, as the paper highlights, real time gross settlement or the migration to T+0 would require significant technology rewrites as well as wholesale business process changes.
SIONIC recommends that firms begin to review their support processes in trade affirmation timeline processes; clearing fund management; payment processing; and financing and securities lending.
In addition, SIONIC recommends firms review asset servicing risk mitigation and counterparty risk assessment in order to stay ahead of the shortened cycle settlement curve.
SIONIC says: “Today’s digital world is forcing the financial services industry to address the risks inherent in the current T+2 settlement model. We are ready to assist firms in preparation for this necessary and imminent change.”
The authors of the whitepaper include Joseph Denci, managing partner; John Byrne, managing partner; and Jim Monahan, partner.
Go to page 14 of Asset Servicing Times’ latest issue to discover Monahan’s thoughts on the lessons learned in the world of corporate actions over the last year and the opportunities ahead.
While every country has its own settlement cycle, most countries operate on T+2 or two business days after the transaction date.
Recently, the Depository Trust & Clearing Corporation (DTCC) collaborated with the Securities Industry and Financial Markets Association (SIFMA), and the Investment Company Institute (ICI) to accelerate the move of the US securities settlement cycle to T+1.
The organisations believe moving from T+2 to T+1 will benefit investors and market participant firms by reducing systemic and operational risks.
In its new whitepaper, SIONIC highlights that legacy mainframe-based infrastructures, green screens, manual workarounds and duplicative processing are still very much alive in the back offices of some of the largest global banks and in many small regional fully disclosed brokerage firms.
SIONIC says that for far too long, the operational infrastructures at these firms have been underfunded and underappreciated.
According to the firm, the result of this underinvestment is that today’s back-office processes are operationally inefficient, and it is these inefficiencies that present the primary roadblock to shortening the current T+2 settlement cycle.
SIONIC suggests time will be in short supply for firms unprepared for the future.
Inefficiencies in operational processing and collateral management platforms are necessitating that brokers infuse more and more capital into their firms to meet the growing margin requirements from clearing corporations, SIONIC explains in the whitepaper.
SIONIC argues that many of these firms lack the capability and capacity to operate under a shortened settlement cycle because their legacy internal business processes have not kept up with the changing market and evolving institutional trading paradigm.
The primary goal of the operations team is to ensure the settlement process doesn’t adversely impact the trading process.
Without real changes to internal day-to-day processes, meeting these shortened settlement cycles in a timely fashion will be a significant challenge.
The paper notes that the current two-day settlement cycle has a negative impact on clearing fund requirements.
This is because it is calculated based on the aggregate notional value of all the unsettled transactions in a member’s account at any given point in, again, time, SIONIC affirms.
“Given the fact that there are still only 24 hours in each day with no increase in sight, financial services firms must become more efficient to meet the proposed shortened settlement timelines in a T+1 environment,” SIONIC cites.
While there are many operational processing and collateral management systems available that can be utilised in a shortened settlement cycle, SIONIC states that without both business process and behavioural changes being implemented, firms will struggle with the decreased time available to process their settlement activity.
In terms of where the issues with shortening the cycle lie, the paper suggests it is a business process issue more than a technology advancement issue.
The proprietary technology developed by individual firms along with today’s vendor solutions can support the move to T+1.
However, as the paper highlights, real time gross settlement or the migration to T+0 would require significant technology rewrites as well as wholesale business process changes.
SIONIC recommends that firms begin to review their support processes in trade affirmation timeline processes; clearing fund management; payment processing; and financing and securities lending.
In addition, SIONIC recommends firms review asset servicing risk mitigation and counterparty risk assessment in order to stay ahead of the shortened cycle settlement curve.
SIONIC says: “Today’s digital world is forcing the financial services industry to address the risks inherent in the current T+2 settlement model. We are ready to assist firms in preparation for this necessary and imminent change.”
The authors of the whitepaper include Joseph Denci, managing partner; John Byrne, managing partner; and Jim Monahan, partner.
Go to page 14 of Asset Servicing Times’ latest issue to discover Monahan’s thoughts on the lessons learned in the world of corporate actions over the last year and the opportunities ahead.
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