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Implementation of Shorter Settlement Cycle Likely to Slip

The US and Canada, as well as other countries, want to cut the time taken to settle equities but planned deadlines are likely to slip according to Virginie O’Shea, chief executive and founder of Firebrand Research.

In February 2022 the US Securities and Exchange Commission voted to shorten the settlement cycle for US equities from T+2, two business days after the trade date, to T+1. Market participants have welcomed the move to T+1 which is designed to decrease credit, market, and liquidity risks.

A report from Firebrand Research, Post-trade predictions into 2023, said the US and Canada are moving toward shortening the equities market settlement cycle and several Latin American countries have also pledged to do the samein the next few years. India is due to complete the change this year while the UK is reviewing whether to make the move.

In August last year US industry bodies published The T+1 Securities Settlement Industry Implementation Playbook which assumes a third quarter 2024 transition, subject to final regulatory approval from the SEC.

Virginie O’Shea, Firebrand Research

O’Shea said in the report: “However, it is unlikely to be plain sailing toward the implementations and planned deadlines are likely to slip. The economic downturn and the budgetary challenges that will be faced by operations teams will certainly count against T+1 preparation in markets such as the US and Canada.”

She continued that delays are likely in North America as there is a long tail of US and Canadian firms that have not even thought about how to make the move.

“Canada might be in a slightly better position overall due to the relative size of the market but the move is going to be expensive and complex for those burdened with extremely creaky legacy systems and manual processes,” she added.

A survey last year from Torstone Technology, a software-as-a-service (SaaS) platform for post-trade securities and derivatives processing, and Firebrand Research found that nearly all, 81%, of brokers and banks active within the US and Canadian markets are either using manual processes or home-grown systems to support their post-trade processes.

Brian Collings, chief executive of Torstone Technology, said in a statement at the time: “Manual processes and batch processing are simply not compatible with the shift to shorter settlement cycles – firms need to update and automate their middle- and back-office systems or face substantial operational risk.

He added that as the move to T+1 gathers momentum, firms that fail to adapt to industry-driven market structure changes will incur significant risk both operationally and competitively in a challenging market.

Mack Gill, chief operating officer and board director of Torstone Technology, a post-trade technology company for financial markets, told Markets Media last October that his personal thesis is that the required transformation will result in a launch pad for a lot of fintech change.

In order to meet the target of the third quarter of 2024, the industry will need to carry out parallel testing in the first half of 2024. Therefore, firms will need to spend the beginning of 2023 reviewing their technology and making decisions on what needs to be changed.

Gill said: “Organizations need to hit the ground running in 2023. They need to carry out a wholesale review of their operational flow and underlying systems.”

He continued that there will be a lot more debate on the timetable for move throughout 2023 and whether the date needs to be pushed to 2025 as the change is bigger than most people realise. Although T+1 shortens US equity settlement there will be an impact on many other areas including corporate actions, securities lending, cash management and collateral management.

T+1 in Europe

O’Shea said the UK’s establishment of the Accelerated Settlement Taskforce last December has caused huge concern in the European Union. If the UK moves to T+1 to differentiate itself from the EU, markets such as the Netherlands may move out of step with the rest of the EU in order to compete.

“This will be a big talking point in 2023 and though Europe is far from well-positioned to make the move to T+1 at this point, it may well be forced into a corner,” she added. “The initial recommendations of the Accelerated Settlement Taskforce are due in December 2023, so watch this space.”

Europe is not in a position to make the move in the next couple of years due to ongoing settlement inefficiency, which has been highlighted by the implementation of the EU Settlement Discipline Regime as part of the Central Securities Depositories Regulation (CSDR) in February 2022, according to O’Shea.

“There is no doubt that CSDR has failed to achieve its primary objective of bringing down settlement failures across the EU“ she added. “ESMA figures indicate that though equities settlement failure rates dipped to just below 6% in February, they rose to around 10% by June and remained higher than pre-2020 averages for the rest of the year.”

She continued that the CSDR review will be critical.

“Improving internal settlement efficiency and the use of market practices such as auto-partialling and partial settlement will be talking points for the European regulators throughout the next 12 months,” O’Shea added. “Budgets might be tight, but something’s got to give.”