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The T + 2 saga , with a side of Greek wedding
The move to same-day settlement may sound virtuous , but the vast amount of work that was needed for the market to transition to T + 2 back in 2014 may result in T + 0 being a distant fantasy , writes Virginie O ' Shea , founder of Firebrand Research .
In 2002 film My Big Fat Greek Wedding ( stay with me here ), the father character insists on explaining the Greek etymology of every word in the world — even those that have little to do with the Mediterranean continent . “ Kimono ”, for example , comes from “ himona ”, which means “ winter ” etc etc ad nauseam . I feel like this month , I ’ ve been stuck in a constant social media conversation with individuals of the same mindset when it comes to settlement infrastructure and blockchain . Rather than engage in a stream of responses back-and-forth , including some hair pulling and face-palming , I thought I ’ d blog about it . Now , as you may have heard on our recent FinReg podcast , the two-day settlement cycle first came into place in Europe as a result of the first wave of the Central Securities Depositories Regulation ( CSDR ). The innovation and front-office crowds may have paid scant attention to this at the time , but believe me , the middle- and back-office teams were busy preparing for the removal of one day from the cycle back in 2014 . I sat through numerous meetings of working groups and roundtable discussions about the preparations for the two-year period between 2012 ( when CSDR was initially published ) and 2014 ( the deadline for the move ). Although it was a well-executed move on the part of the industry , it wasn ’ t an entirely painless one . Market practice changes to accommodate industry-level events are rarely painless — they involve months of planning , testing and re-testing — just look at the Australian market ’ s ongoing delays to the CHESS system launch for proof . The US market , in turn , decided that rather than look like a laggard , it would also move to T + 2 in concert with Europe . This ensured that transatlantic clearing and settlement processes were in sync and , to be frank , the DTCC had been pushing for the move for some time and rightly capitalised on the peer pressure . The move to T + 2 wasn ’ t done without considering shorter alternatives . As you can see from the Firebrand Research map , some markets are on shorter settlement cycles such as China and certain Middle Eastern markets . However , the decision was taken for rational reasons — a move to T + 1 would require much more investment and market practice changes to an area the industry doesn ’ t ever want to spend money on . The biggest problem here isn ’ t the CSDs . It isn ’ t about the technology that underlies these infrastructures ( though that definitely could do with an upgrade or two ). You don ’ t need a distributed ledger system to support T + 1 or T + 0 — the markets that support these cycles today certainly don ’ t . The problem is the market practices around liquidity and risk management , lending activities , netting etc . If we ’ re going to make a wholesale change , we ’ re going to have to invest in middle- and back-office changes of a magnitude that would make most CTOs quake . I spend my days researching these areas — in fact , I ’ ve spent decades talking about these topics . Why do we have so many mainframes in the back-office ? Why do we have risk systems that can ’ t cope with real-time support ? The short answer here is it ’ s painful and difficult to replace these systems . Capital markets firms rarely want to invest in things just because they ’ re good for the industry . Plus the project risk is high , and I mean really high . Some of these systems look like the leaning Tower of Pisa , they ’ ve had so much built on them over the years . To all you crypto people out there , yes Bitcoin , Dogecoin , and every other cryptocurrency the likes of Elon Musk pumps investment into works in a different way , but it hasn ’ t had to deal with this legacy problem . Seriously , if another person makes reference to everything in crypto being instant and 24 / 7 like I don ’ t already know that , I ’ ll scream . I certainly don ’ t want to discourage technologists from thinking about this realm — please , we need change to happen . But you have to look at things from an entirely practical perspective . Don ’ t be the dad from My Big Fat Greek Wedding .
Virginie O ' Shea
66 Global Custodian Spring 2021