ISITC Europe releases T+1 report commissioned by the SWIFT Institute
31 May 2023 UK
Image: H_Ko/stock.adobe.com
ISITC Europe’s ‘Industry preparedness for accelerated settlement’ working paper has been published.
The paper, commissioned by the SWIFT Institute, investigates how prepared the industry is for T+1, the progress that has been made so far and what industry opinion is on implementing a shortened settlement cycle.
The research team included ISITC’s Tony Freeman, Anthony Gandy and Gary Wright, who spoke to AST in March about the report’s progress. Cathy Wright, Nancy Murphy and Ulster University’s Daniel Bropy and Mark Durkin also contributed to the paper.
The research confirmed the benefits of T+1, such as reduced counterparty risk, lower settlement margins and increased fund access, however also reports that there are several “very fundamental concerns” in the industry and lists areas in need of attention.
Pre-funding and operational disruptions require further research, the report states, highlighting non-domestic buy-side firms which buy into and trade US equities as a group needing to create models for these operations in a T+1 environment.
As such, the report suggests that policymakers align their settlement systems with the largest global market in order to prevent discontinuities between markets, and engage with regimes also using accelerated settlement processes so that key processes and decision makers remain onshore.
Individually, firms should be clear on the consequences of missing T+1 settlement deadlines in each regime they are operating in, and must consider contractual mitigation if they cannot cost-effectively meet these deadlines.
To enable accelerated settlement implementation, automated affirmation and straight-through processing must be adopted on a larger scale in order to increase settlement efficiency and reduce risk. Work in this area must be approached as a necessity rather than an “optional extra” in order to be successful, the report says.
Additionally, nonstandard instructions and paper-based processes must be eliminated to reduce costs and ensure compliance, and batch processes must be removed in order to ensure deadlines are met.
Concerns about the move to T+1 included the chance of risk transfer from financial to operational operations, operational preparedness and the ability for firms to deal with operational risk failures.
Wealth managers are said to be “highly negative in sentiment” around T+1, and expect it to raise operational costs and risks within their part of the business. The report agrees that “acceleration can come with significant costs, and, maybe less intuitively, risks”.
It goes on to say that T+1 may be seen as a “compromise regime” between current operations and atomic settlement, and emphasises the difficulties that global market participants will face when Canada and the US move to a T+1 settlement cycle next year.
If faster settlement cycles are mandates, then firms will be forced to improve their processes. However, “the timetable and potential cost of pre-funding for non-North American investors work against this,” the report warns, with non-domestic investors set to face high costs and inconvenience with the shift.
The report affirms that “the industry is firmly on the road to accelerated settlement,” but advises that preparations need to be “enhanced” in some areas and existing technology products need to be employed.
There is “a need for an orderly and smooth transition to instant and ultimately simultaneous settlement,” the report concludes, reassuring that the complexities of initiatives such as forced automation adoption and costs “will, in the long run, produce benefits”.
Daniel Carpenter, CEO of Meritsoft, a Cognizant company, comments: “Financial institutions globally need to be planning for how they will manage the likely increase in trade settlement fails as they contend with the T+1 timeframe. Many institutions we speak to are looking at managing this as a continuation of the processes they implemented to improve settlement efficiency that began with CSDR.
"As those who have handled CSDR effectively will know, key to improving settlement efficiency is a clear understanding of why settlements are currently failing, where they are failing, and who they are failing with. This can only be done effectively if all the settlement data from multiple systems is normalised and made centrally accessible to enable any meaningful analysis. Having this insight provides the foundation for optimising and automating settlement processes to reduce the overall volume of fails more quickly.
“Systems for routing and processing trade fails need to be updated with a strategic goal of improving settlement efficiency across the bank’s different regional hubs and desks. Without this, banks will not only struggle to meet the T+1 requirement but will also be at risk of significantly higher costs from interest claims charged for trade fails, something we are also seeing an increase in as today’s higher interest rates bite.”
The paper, commissioned by the SWIFT Institute, investigates how prepared the industry is for T+1, the progress that has been made so far and what industry opinion is on implementing a shortened settlement cycle.
The research team included ISITC’s Tony Freeman, Anthony Gandy and Gary Wright, who spoke to AST in March about the report’s progress. Cathy Wright, Nancy Murphy and Ulster University’s Daniel Bropy and Mark Durkin also contributed to the paper.
The research confirmed the benefits of T+1, such as reduced counterparty risk, lower settlement margins and increased fund access, however also reports that there are several “very fundamental concerns” in the industry and lists areas in need of attention.
Pre-funding and operational disruptions require further research, the report states, highlighting non-domestic buy-side firms which buy into and trade US equities as a group needing to create models for these operations in a T+1 environment.
As such, the report suggests that policymakers align their settlement systems with the largest global market in order to prevent discontinuities between markets, and engage with regimes also using accelerated settlement processes so that key processes and decision makers remain onshore.
Individually, firms should be clear on the consequences of missing T+1 settlement deadlines in each regime they are operating in, and must consider contractual mitigation if they cannot cost-effectively meet these deadlines.
To enable accelerated settlement implementation, automated affirmation and straight-through processing must be adopted on a larger scale in order to increase settlement efficiency and reduce risk. Work in this area must be approached as a necessity rather than an “optional extra” in order to be successful, the report says.
Additionally, nonstandard instructions and paper-based processes must be eliminated to reduce costs and ensure compliance, and batch processes must be removed in order to ensure deadlines are met.
Concerns about the move to T+1 included the chance of risk transfer from financial to operational operations, operational preparedness and the ability for firms to deal with operational risk failures.
Wealth managers are said to be “highly negative in sentiment” around T+1, and expect it to raise operational costs and risks within their part of the business. The report agrees that “acceleration can come with significant costs, and, maybe less intuitively, risks”.
It goes on to say that T+1 may be seen as a “compromise regime” between current operations and atomic settlement, and emphasises the difficulties that global market participants will face when Canada and the US move to a T+1 settlement cycle next year.
If faster settlement cycles are mandates, then firms will be forced to improve their processes. However, “the timetable and potential cost of pre-funding for non-North American investors work against this,” the report warns, with non-domestic investors set to face high costs and inconvenience with the shift.
The report affirms that “the industry is firmly on the road to accelerated settlement,” but advises that preparations need to be “enhanced” in some areas and existing technology products need to be employed.
There is “a need for an orderly and smooth transition to instant and ultimately simultaneous settlement,” the report concludes, reassuring that the complexities of initiatives such as forced automation adoption and costs “will, in the long run, produce benefits”.
Daniel Carpenter, CEO of Meritsoft, a Cognizant company, comments: “Financial institutions globally need to be planning for how they will manage the likely increase in trade settlement fails as they contend with the T+1 timeframe. Many institutions we speak to are looking at managing this as a continuation of the processes they implemented to improve settlement efficiency that began with CSDR.
"As those who have handled CSDR effectively will know, key to improving settlement efficiency is a clear understanding of why settlements are currently failing, where they are failing, and who they are failing with. This can only be done effectively if all the settlement data from multiple systems is normalised and made centrally accessible to enable any meaningful analysis. Having this insight provides the foundation for optimising and automating settlement processes to reduce the overall volume of fails more quickly.
“Systems for routing and processing trade fails need to be updated with a strategic goal of improving settlement efficiency across the bank’s different regional hubs and desks. Without this, banks will not only struggle to meet the T+1 requirement but will also be at risk of significantly higher costs from interest claims charged for trade fails, something we are also seeing an increase in as today’s higher interest rates bite.”
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Collaboration is key to improve settlement efficiency, WFC speakers agree
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