T+1 – Going to the Next Level

A number of countries are starting to embrace T+1.
India phased in T+1 gradually for its equity market over the 12 months leading up to January 2023, while the US, Canada and Mexico are on course to introduce T+1 from next year.

Meanwhile, a UK government task force is currently exploring the feasibility of T+1 and T+0, with findings expected in 2024. The EU is consulting on T+1 as well, with an Association for Financial Markets in Europe (AFME) task force currently assessing its potential benefits and challenges.  

Dozens of other countries, including emerging and frontier markets, are also talking about T+1.

“T+1 is a topic of conversation here in APAC, but the focus is more about shortening settlement cycles generally and not just to T+1. Some markets, including the Philippines, for example, are adopting T+2,” said Conrad.

What Does T+1 Mean for the Industry?

T+1 will create opportunities for the industry.
Firstly, adopting T+1 should help reduce settlement and market risk and free up collateral that would nominally be held at CCPs, facilitating greater liquidity. T+1 is also forcing institutions to update legacy or inefficient systems, either through automation or adoption of Swift’s Unique Transaction Identifier (UTI).

However, the transition is likely to cause some friction as well. 

With the time to carry out post-trade operations being badly squeezed, trades are more likely to fail, which could result in financial firms incurring higher costs and penalties in certain markets, especially those which fall under the EU’s Central Securities Depositories Regulation’s (CSDR) remit, said Conrad.

Conrad added that financial institutions in Asia will be the ones most likely to experience disruption following the US adoption of T+1,  due to the time zone differences. In particular, he warned that Asian institutions may need to pre-fund their FX transactions, creating further cost pressures and risk.

Despite the adoption of T+1 being less than six months away in North America, there are mounting concerns that financial firms in Asia are  behind the curve with their preparations. This is a deficiency which needs to be urgently addressed, according to Conrad.
Other activities which could face disruption following the transition to T+1, include securities lending, corporate actions and cross-border settlements of exchange traded funds (ETFs) and global depository receipts (GDRs).

Life after T+1

Notwithstanding these operational issues, some markets are thinking about T+0, said Conrad.

During TNF, the Securities and Exchange Board of India (SEBI) confirmed that it was exploring T+0, although the regulator stressed that this proposal was still in its early stages. While India navigated the transition to T+1 relatively seamlessly, a move to T+0 would be more complicated, requiring  financial institutions to overhaul their operations and technology infrastructure.

As adoption of distributed ledger technology (DLT) grows, it is possible that atomic (i.e. instant) settlement of cash and securities could become a reality. In theory, atomic settlement will help eliminate settlement risk,  although some warn that it does not offer the netting efficiencies which are available in T+2 markets today. 

Having established a local branch in the US in 2021, SIX has since expanded its custody footprint to Singapore, enabling it to provide bespoke services to clients in both North America and Asia.

Lukas Conrad, Regional Head Securities Services, APAC, SIX

SIX Supports Clients in APAC in Adapting to Shorter Settlements

The switchover to T+1, T+0 and potentially even instant settlement is going to cause logistical and operational challenges for clients. Working with best-in-class service providers will be essential if the process is to be straightforward.

Most importantly, custodians will need to have robust and automated technology solutions in place to help clients deal with the compressed settlement timeframes.

A “follow the sun” operating model is imperative here, as this will enable providers to support customers with their T+1 obligations across multiple time zones. Having established a local branch in the US in 2021, Conrad said SIX has since expanded its custody footprint to Singapore, enabling it to provide bespoke services to clients in both North America and Asia.

In addition to providing Swiss and international customers access to the US and Asian markets, it also enables SIX to offer US and Asian-based institutions access to all major markets across a broad range of asset classes, together with T+1 support,  through a single contractual relationship.

As and when atomic settlement is adopted, SIX is also well positioned, thanks to its Digital Exchange (SDX), continued Conrad, which can already facilitate instantaneous settlement.

As more markets make the T+1 leap, engaging with service providers which have credible technology solutions and a global operating model will be critical, if financial institutions are to cope with the transition.

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