T+1: Looking Back to Determine the Future of Settlement
Looking at the road to T+1, Philip Slavin, CEO of Taskize, delves into some of the historical challenges the industry has faced to get to this point.
Sometimes, it is good to look back to see what the future may hold. Nowhere is this more the case than with the shift to T+1. Back in the 1700s, the Dutch Stock Exchange and the London Stock Exchange were almost brothers in arms – often listing each others stocks. When it came to clearing each other’s stocks, time was needed to get hold of a physical copy of a stock certificate or cash to move from Amsterdam to London and back. Hard to believe given how far the markets have come, but this led to a staggering industry standard settlement time of 14 days which was the time it usually took for a courier to make the journey by ship, and sometimes horseback.
Even harder to believe is that this settlement model, at least between the UK and Holland, lasted for hundreds of years. It took the not so small matter of a stock market crash in 1987, infamously dubbed Black Monday, for settlement times across most global exchanges to significantly reduce. In fact, the move by most stock exchanges towards the adoption of T+2 did not happen until last decade – with the UK adopting in 2014, and the US following suit three years later.
Fast forward to today, and the move to T+1 is currently due to go live in March 2024. However, given the fact that it took hundreds of years for settlement cycles to shorten, history is against T+1 happening by this date. Some may point to how, for instance, India has started to make a shift to T+1. This is all well and good but, unlike the global nature of the US markets, the vast majority of trading in India is domestic. Financial institutions may be able to shorten batch cycles, shorten cut of times, even throw more bodies at a trade dispute, but they can’t do anything about the time difference between the US, Europe and Asia. Therefore, the ability to get tasks done quicker is not just about efficiency in the local market, it is the fact that time waits for nobody while clock ticks, and there is a time zone issue that has to be addressed.
As a prime case in point, take the example of an Asian asset manager placing an order at the end of the trading day for a basket of US stocks needing to be filled at the end of the US day. The Asia asset manager in question will not be receiving the order fill until the following day (Asia time). In essence, this means that an entire day has been lost. The investment firm would have sent the order in, got the fills back, but they would then have to allocate the fills to the relevant funds. All this before then starting to match the trade before ultimately settling the trade.
Time waits for no financial institution. Reducing breaks and improving straight through processing (STP) has to be the primary objective. The problem is the amount of time and effort the settlement process takes – especially when using inefficient forms of communication like email or phone. The continued use of these antiquated methods of communication, which are the modern equivalent of sending a securities certificate by ship or horseback, significantly increases the chances of firms failing to make T+1. Even the adoption of more modern forms of communication, such as chatbots, will not make a drastic difference. To seek out real efficiencies, there is a need for a specific tailored and integrated workflow that is designed to help firms manage and accelerate collaboration across operations teams.