[ T H O U G H T L E A D E R S H I P | S I X ]
THE ROAD TO T + 1
Javier Hernani , head securities services at SIX , provides a CSD perspective on moves to T + 1 in Europe .
Like a slowly ticking clock , global markets are moving towards a time when trade date and settlement date will be synonymous , but how close are we today ? In the US , with GameStop still relatively fresh in regulators ’ minds and the idea of ‘ meme stocks ’ still current , the impetus to move to T + 1 is well advanced and a further reduction to T + 0 is a subject of live discussion and debate . Will Europe follow suit ? A recent paper by AFME on the move to T + 1 in Europe suggests people are waiting and expecting movement in this direction and urges conversations to begin . However , the movement to T + 1 in Europe will be much more complicated in Europe than in the States . The US market is a huge domestic market with one legislative rule book and a smaller number of different market infrastructures compared to Europe . Additionally , Europe has to cope with trading cross-border in different currencies in one single market . As long as FX markets settle on T + 2 , this may create a setback for even the most enthusiastic proponents of reduction in settlement timeframes . It would seem a necessary accompanying step that FX settlement also move to T + 1 to harmonise with T + 1 in securities settlement .
Challenges of T + 1 Even were that to happen , other challenges for a pan-European move
to T + 1 remain . The broadly accepted benefits of a reduction in settlement time frame include among others a clear reduction in counterparty and market risks , and consequently a significant decrease in margins . These benefits , however , need to be set in the context of how much they will cost to achieve . Such costs include updating infrastructure to make T + 1 both feasible and reliable . Outside of the infrastructures themselves , necessary changes to some post-trading processes to enable the move imply significant costs . Even if the requisite technology is implemented , a T + 1 settlement environment could be particularly demanding for certain investment products . If we take the example of ETFs , T + 2 is already difficult in some circumstances , given that such structures involve underlying securities from a range of time zones and currencies . Without giving these factors serious consideration , there is a clear risk of increasing settlement failures as an unintended consequence of reducing settlement timeframes . This could be problematic for market participants , not least because of the penalties for failed trades in the EU resulting from the implementation of the Settlement Discipline Regime under CSDR . Were fails to increase , this could significantly reduce the benefits of T + 1 , while securities lending to cover short positions could also be affected due to time pressures , increasing even further the risks of settlement failures . CSDs themselves are obviously already ready to settle on T + 1 or even T + 0 as T2S is able to settle from T to T + n . However , CSDs do not operate in a vacuum . To achieve T + 1 , it is essential to improve procedures from the moment the trade is executed until the settlement instruction is introduced in the CSD . The increased use of partial settlement in the CSD may
18 Global Custodian Fall 2022