Don’t Just Do Something, Stand There!

In Europe, we have been harmonising and shortening settlement cycles for years, even decades. Doing so decreases pre-settlement risk and the capital deployed to alleviate this risk. The last move (from T+3 to T+2) went particularly well. It was a while ago now. So, with the US and India moving to T+1, the spotlight falls on Europe.

Even those who are not usually interested in posttrade are asking if we should reduce our settlement cycle to T+1, or maybe even T+0. And our industry’s response has been, at best, somewhat muted.

Whilst it is accepted that shortening settlement cycles is generally good, many post-trade participants are worried that moving to T+1 may increase operational risk and costs, particularly for foreign investors. Today’s discussion regarding moving to T+1 has not changed much since the last time it was considered, when markets decided that T+2 was a better option. The advantages of T+1 are counterbalanced by the following problems -

CSD settlement processing often takes place in an overnight cycle. So with T+1 all post-trade pre-settlement processing (e.g. affirmations, allocations, matching, CCP netting) and any stock borrowing required needs to take place on the trading day

These timing issues are particularly challenging if an entity is trading in a different time zone from its location (e.g. if Europe moved to T+1, US investors in Europe would have to complete all post-trade processing in the afternoon of trading, and Asian investors would have to complete all post trade processing outside business hours)

The FX market will still be settling on T+2. So entities may have to pre-fund, borrow currencies or use less liquid markets.