90% of Market Participants See Elevated Risk in Moving to T+1 Settlements

Torstone Technology, a provider of post-trade securities and derivatives processing, together with Firebrand Research, a capital markets research provider, has presented a study regarding the challenges and impacts of plants to reduce the settlement cycle in North America and potentially in the UK over the next 24 months.

Torstone Technology Report on Shorter Settlement Cycles

In March 2023, a study was conducted that included perspectives from the buy-side Buy-Side The buy-side is comprised of firms in the financial industry that purchase securities and are accompanied by account investment managers, pension funds, and hedge funds.The buy-side is composed of those that buy and invest large sums of securities with the intention of generating a lucrative return or have their funds managed. The Buy-Side ExplainedIn terms of Wall Street, the buy-side includes investment institutions that purchase securities, stocks, or other financial instruments with the aim The buy-side is comprised of firms in the financial industry that purchase securities and are accompanied by account investment managers, pension funds, and hedge funds.The buy-side is composed of those that buy and invest large sums of securities with the intention of generating a lucrative return or have their funds managed. The Buy-Side ExplainedIn terms of Wall Street, the buy-side includes investment institutions that purchase securities, stocks, or other financial instruments with the aim Read this Term, sell-side, and service provider market participants. The resulting report, entitled 'The British Perspective on T+1', outlines key concerns and areas of focus for the UK market in light of North America's upcoming shift to T+1.

In addition, the report reveals considerable doubt about the practicality of the timeline leading up to the implementation date, which was set by the United States Securities and Exchange Commission (SEC) on 28 May 2024. Market participants expressed significant concerns in four areas, with unanimous agreement among those consulted for each one.

These areas include global inconsistency and complications, Operational and technological hurdles, Buy-side participation and operational costs. For example, participants unanimously agreed that a landscape of shortened settlement cycles post-trade securities operations would require a high degree of automation and efficiency. Notably, concerns were raised regarding the middle-office confirmation and allocation bottleneck, potential changes to asset servicing, and potential disruptions in securities lending flows.

"The move to T+1 in the US has an inevitable knock-on effect on global markets, with EMEA firms facing ongoing challenges. But there is a silver lining. The move to T+1 settlement creates opportunities for firms to improve their operational efficiency and reduce risk. By embracing automation and digital transformation, firms can enhance their middle- and back-office systems and gain a competitive edge," Brian Collings, the CEO at Torstone Technology, commented on the report.

The SEC adopted the final requirements for shortening the settlement cycle from T+2 to T+1 on 15 February 2023. When a buyer and seller initiate a trade, the settlement date is the number of days that have passed since that date. The settlement date is typically denoted using abbreviations such as T+1, T+2, and T+3, where T+1 signifies that the trade was settled on the next business day following the transaction date, and T+2 means the trade was settled on the second business day following the transaction date.

Will the UK Feel the Negative Effects of the Change?

North American markets have already set a for the transition to a shortened settlement cycle. However, last year, the UK government launched an investigation to determine whether it should also move to T+1. The UK government intends to make a decision on the matter after the UK Accelerated Settlement Taskforce releases a report based on a year of industry consultation, which is expected to be delivered by the end of 2023.

According to Torstone's report, industry participants do not seem very keen on T+1 for the UK currently, as there are many concerns regarding the move. Moving to T+1 could result in a prolonged period of increased settlement Settlement Settlement in finance refers to the process when a buyer makes payment and receives the agreed-upon services or goods. The term is used on exchanges such as New York Stock Exchange (NYSE) when security changes hands. When the asset is transferred and placed in the new buyer's name, it is considered settled. This process could take a few hours or several days after a trade is made. It depends on the clearance process. In the United States, the settlement date for marketable stocks is usually 2 Settlement in finance refers to the process when a buyer makes payment and receives the agreed-upon services or goods. The term is used on exchanges such as New York Stock Exchange (NYSE) when security changes hands. When the asset is transferred and placed in the new buyer's name, it is considered settled. This process could take a few hours or several days after a trade is made. It depends on the clearance process. In the United States, the settlement date for marketable stocks is usually 2 Read this Term failures and higher costs for the investment community in the UK. The combined costs of penalties associated with the Central Securities Depositories Regulation (CSDR) and operational costs such as overdraft charges could be significant. As a result, brokers and custodians may need to pass some of these costs on to their clients.

"As the industry focuses on the move to T+1, the key pain points and themes are emerging for the UK market. Cost, time zones, and a lack of buy-side engagement are just some of the complex aspects that require significant collaboration across the industry. Only through close collaboration and communication can the industry effectively address the operational and technical challenges associated with moving to a shorter settlement cycle," Virginie O'Shea, the CEO and Founder of Firebrand Research, commented.

Overall, 90% of study participants agreed the risk of moving to T+1 might increase the risk of trade failures, penalties, and market inefficiencies.