TRADE SETTLEMENT CYCLES
standardisation of industry processes. This could bring about greater straight-through- processing (STP) and help the industry shift away from manual-based activities, which in turn should improve accuracy and resiliency. In India, where retail trading is dominant, local brokers – many of whom have suffered from margin contraction over the last few years – believe that T+1’s introduction could help stimulate trading volumes once again. “The key benefit is that capital can be deployed more efficiently. Imagine being able to buy a stock today and sell it off tomorrow – this might actually be possible under T+1,” says Sriram Krishnan, Head of Securities Services, India and Sub- Continent, Deutsche Bank.
T+1: no change without risk For all the anticipated benefits, there is a tacit acknowledgement that T+1 could also pose logistical challenges. For financial institutions operating in different time zones, settlement compression can create inefficiencies, especially around trade matching, end of day reconciliations and foreign exchange (FX) management. This is because the traditional two-day
settlement window helps global investors manage FX, but a shift to T+1 would force FX to be booked on the same day/T+1, meaning all parties in the settlement chain will need to confirm trades on the trade date – potentially resulting in issues around pre-funding. Despite the potential risks, market
participants anticipate the T+1 transition will be smooth, provided the industry makes the technology changes that are required in advance of the deadlines. “As long as the industry continues to implement new technologies to address accelerated settlement, then T+1 should be achievable,” reflects Kamalita Abdool, Head of Securities Services, Americas, Deutsche Bank. Past precedent in the US also suggests
that T+1’s adoption will be pain-free. For example, experts warned that settlement fails would skyrocket ahead of T+2’s adoption in 2017, yet these issues never materialised.
T+0: the future beckons While there is scepticism about the merits of introducing a T+1 settlement cycle without impacting the value chain, market practitioners are also open to T+0. Again, the benefits of shorter settlement
cycles (e.g. less counterparty risk, capital and liquidity savings) ring true for T+0 just as they do for T+1. It is also clear that many of the barriers inhibiting T+1 are likely to inhibit the future adoption of T+0 as well.
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The end goal for settlement compression must be T+0
Mike Clarke, Global Product Manager, Securities Services at Deutsche Bank
But Mike Clarke, Global Product Manager, Securities Services, Deutsche Bank, explains, “The end goal for settlement compression must be T+0 and this can be facilitated through the adoption of disruptive technologies, such as distributed ledger technology (DLT), smart contracts and central bank digital currencies (CBDCs) or digitalised versions of central bank-issued money.” He explains that by leveraging such technologies, cross-border transactions could potentially be settled more quickly, culminating in T+0 or even atomic settlement (the instant exchange of two linked securities). This could help market users procure massive operational and cost savings, especially as instantaneous settlement would remove the need for CCPs. Similarly, the emergence of CBDCs could
play a role in bringing about T+0. CBDCs – digital iterations of fiat currencies issued by
central banks, which are stored on a DLT – engineer efficiencies in securities settlement by using central bank money. As investment into these technologies increases, the possibility of delivering on T+0 will grow. Markets such as India are already
exploring the viability of such technologies, with the Reserve Bank of India poised to introduce a digital rupee in 2023. However, technologies such as DLT, digital assets and smart contracts are not subject to uniform industry standards or common regulation. Without basic harmonisation, the ability for market participants to operate with each other in post-trade processes, such as settlement, risks being undermined. More fundamentally, T+0 will never be achievable unless other activities in the investment value chain become real-time or instant as well. For example, if payment settlement systems and FX processing continue to rely on antiquated or legacy technologies, then T+0 will be harder to achieve. Only if there is meaningful digitalisation across the entire transactional lifecycle will T+0 become a reality.
Where do we go from here? Having introduced T+2 smoothly, the industry is confident T+1 will be seamless, especially as there is ample time until implementation. If T+1 provides the risk management benefits claimed by its proponents, then calls for further settlement cycle optimisation will inevitably grow.
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