Shorter trade settlements become a reality

The future of trade settlements featured extensively at Sibos, as a number of markets – most notably the US – look set to replace T+2 with T+1 by 2024. While shorter settlements provide extensive risk benefits, it can cause problems. In particular, some financial institutions – especially those operating in time-zones outside of the US – could be forced to pre-fund their trades.

Others warn the number of trade fails could rise exponentially, as intermediaries will have less time to resolve any trade issues ahead of settlement. This could result in financial institutions incurring additional cash penalties under rules such as CSDR’s (Central Securities Depositories Regulation) Settlement Discipline Regime.

Europe’s attitude to shorter settlement cycles is harder to gauge. Although there is talk of the UK taking advantage of its post-Brexit status to adopt T+1, the EU remains non-committal. There are several reasons for this. Firstly, the EU has only just introduced CSDR, and it will probably wait for this regulation to bed down properly before embracing T+1.

On a practical level, the process of implementing T+1 in the EU will be much more complicated than in the US, as there are multiple CSDs and regulatory regimes across member states. Experts largely agree that it will take several years for T+1 to take effect.

However,  Javier Hernani, head of securities services at SIX, posited whether it would make more sense for Europe to leverage new technologies – instead of investing into legacy systems -  to implement settlement compression, especially if the transition were to take more than, say five years. More from Javier Hernani on this topic can be found in this article published by Global Custodian.

Beyond trade settlements, there was extensive debate during Sibos about the role of distributed ledger technology (DLT) in other areas of post-trade, including centralised clearing.

Teresa Castilla, Head of Clearing Business Strategy at SIX, said during the panel organized by the European Central Bank that she is yet to be convinced that DLT would collapse trading and post-trading activities into a single atomic process. She noted that FMIs such as CCPs provide an invaluable role in supporting capital markets through the provision of netting benefits and liquidity.

Digital assets move beyond the experimentation stage

Despite the recent crypto-winter, appetite for digital assets is not fading away. Although institutional investors are sceptical about crypto-currencies, there is interest in tokenised securities.

Some custodians are already looking to capitalise on the growing appetite for tokenised assets by creating digital custody platforms alongside their existing custody products. In the case of SIX, the Exchange has launched SDX (SIX Digital Exchange), a new and ambitious FMI (financial market infrastructure) which can support the issuance, listing, trading, custody and settlement of digital assets.

CBDCs (central bank digital currencies) were discussed at length during Sibos too. As a concept, CBDCs are very interesting although there are concerns about market fragmentation proliferating in this space, with growing calls for countries to collaborate with each other to facilitate interoperability between different CBDC platforms, together with non-CBDC platforms.

To get a full overview of our Sibos 2022 videos, articles, interviews and presentations, visit the "SIX at Sibos" event page.

The Future of Finance

Jos Dijsselhof, CEO at SIX, presented at Sibos on the company’s recent survey – The Future of Finance. Despite the risk of interest rates rises and mounting inflationary fears, Dijsselhof said financial institutions are largely optimistic about the future, with 90% of leaders telling the survey they anticipated strong or moderate growth over the next three years, with investment banks being the most bullish, followed by asset managers and retail banks.

However, the survey found asset servicers to be the least optimistic, with just 35% saying their businesses are positioned strongly for growth.

He continued that there are a number of opportunities for financial institutions to capitalise on, including the growing value of data analytics; the potential offered by new asset classes (i.e. digital assets), and digital transformation, namely the eschewing of manual processes in favour of automation. Nonetheless, Dijsselhof stressed there are risks facing the industry, including inflation and a stagnating economy; the increasing problems posed by cyber-crime, geopolitical volatility and acute labour shortages. He added that financial services did not have the same appeal for young talent that it once did, noting this was an issue which required urgent resolution.

Future of Finance Study

An Insight into the Minds of Financial Industry Executives around the Globe

Countdown to Toronto

After a successful Sibos in Amsterdam – where the industry was able to finally reconnect in person, SIX is looking forward to returning to Sibos in Toronto next year.