What sort of impact will an ‘unevenness’ in settlement times have for institutions?
When the US moves to T+1, we will definitely see an increase in settlement fails initially and US regulators understand there will be a dip in settlement efficiency. The impact will be felt globally, with all firms trading US-listed securities having to adapt to the shortened settlement period. With 43% of US securities being held by foreign investors, the size of the issue is not just limited to the US. To get an idea of the scale of this change, it’s been estimated that we will see an 85% reduction in time to match and settle trades. It’s also going to impact cross-border activity and firms that trade dual listed stocks. There will be a well-documented impact on other areas, such as stock lending, FX and ETFs, and we will be looking to see how T+1 lands in the US on those wider activities.
What sort of changes need to be made to communication channels and human behaviour?
Communication along the entire chain now needs to be in focus right across the market, from custodians to counterparties to clients – they’re all going to be key to ensure the post-trade processes run as smoothly as possible. Firms should remember that they’re only going to be as efficient as their weakest link. It’s a real call for the industry to work together to make T+1 a success.
That change in market behaviour needs to be seen right across the post-trade process because everyone’s going to have to operate in the shortened timeframe, which might mean some firms will need to change working hours for their teams and, importantly, the way they communicate up and down the value chain and align to the new, shortened timeframe to the post-trade process. Large international firms have the benefit of scale, appropriate infrastructure and market-leading expertise on their side. Many already have, or are, implementing ‘follow the sun’ models across their trading desks, introducing global workflows to ensure the shortened settlement timeline can be met across different time zones. However, it will be equally important to adapt back-office operations to ensure settlement and clearing activity can keep pace. We’re also starting to see headlines about the transition of resources across different time zones and locations. There’s a lot to consider.
From our own view, within BNY Mellon Pershing, we’re running an implementation programme and the communication workstream is a key part of this. We want to engage with our clients and our counterparties in terms of issuing frequently asked questions and documents, running webcasts and importantly, being involved in end-to-end testing.
What are the key automation and tech upgrades that need to be made?
There isn’t a straightforward solution that a firm can implement to make itself T+1 resilient. We’ve talked about the operational strain, but operation resilience is high on the regulatory agenda. In fact, it’s on a parallel footing now to financial resilience and regulators want to see some really good outcomes for consumers, as well as for firms. The move to T+1 ultimately aims to provide investors with quicker access to their funds. At BNY Mellon Pershing, we’ve noted that this shift in expectation is already leading to a rise in back- and middle-office outsourcing as firms look for ways to improve operational efficiency and ultimately remain competitive.
The SEC in the US has a paradigmatic view, accepting there’s going to be a level of delayed settlement initially. However, this does not mean firms should become complacent when it comes to automating processes and implementing tech upgrades to improve efficiency in the post-trade process. Buy-side firms should be upgrading legacy systems and processes that might not be able to support trading, settlement and clearing on a T+1 basis and that introduce, quite simply, too much operational risk. The move to T+1 may have accelerated the need for tech upgrades across post-trade operations, but the close relationship between operational efficiency and market competitiveness will have necessitated these improvements at some point anyway, so firms should be viewing these upgrades as critical to the long-term success of their business.
How can previous knowledge from the move to T+2 be leveraged ahead of this next transition?
Firms will have playbooks from the previous move from T+3 to T+2 and they can certainly revisit those, but the move towards T+1 is far more significant because of the extent to which it will reduce post-trade processing times, leaving some markets – notably in Asia – operating on a T+0 basis due to time differences. In the US, the industry associations have published a playbook that provides some clarity on the technical changes required of firms, which is welcome as the UK starts to plan its move to T+1. In instances like this, when changes to the rulebook will be felt globally, the financial services industry must come together and foster collaboration to ensure experiences are shared and lessons can be learned from the US and Canada’s move to T+1.
BNY Mellon Pershing is actively participating in the industry association working groups to prepare for the impact of T+1 and the next steps being taken by UK and EU markets, and we recommend that other firms affected by the changes engage in similar discussions.
However, it is important to remember that at the time of the move to T+2, the UK was part of the EU. Now, post-Brexit, the move will likely look different from a UK and European perspective. The two may not be joined up in their approach and the shift could occur at different times. All firms trading UK and European securities should therefore be thinking about the different moving parts involved in a staggered UK-EU shift and what this will mean for their trade and post-trade processes. There is potential for a high degree of market fragmentation if these jurisdictions don’t move together and firms should be thinking about the impact this could have on their operating models.
Before implementing any changes, regulators in the UK and EU will be closely watching the success of the US and Canada’s move to T+1. Once that’s happened in May 2024, global regulators will have, in effect, a real-life playbook to draw learnings from. They, as well as firms, will be watching closely to see what lands well and what doesn’t in terms of settlement efficiency, as well as the ongoing operational impact of the move on firms and the wider marketplace.