The Finishing Touches Are Made to T+1
Expect North America to roll out T+1, but European markets will take a ‘wait and see’ approach.
After two years of thorough preparations and industry-wide testing, the United States, Canada, and Mexico are set to adopt a T+1 settlement cycle in May 2024. India, having implemented T+1 in January 2023, will introduce an optional T+0 settlement cycle (same day) in March. Plans are also underway for potential instant settlements in 2025, marking significant advancements in the efficiency and speed of financial transactions in the Indian market.
With the implementation of T+1 in North America less than five months away, many financial institutions, particularly those in Europe and Asia, are still in the process of ensuring full readiness for the upcoming changes.
“The introduction of T+1 in North America will bring changes for buy-side and sell-side firms in Europe and Asia, considering the time-zone differences between the markets. Various activities, including FX management, securities lending and borrowing, corporate actions, and settlements involving Exchange Traded Funds (ETFs), dual-listed securities, and American Depository Receipts, will also be affected. With a shorter time available for trade processing, there may be an uptick in trade fails and associated penalties. This challenge will be particularly noteworthy in Asia and Europe. It's crucial for the industry to use the time before May 2024 to prepare and test systems for a smooth transition to T+1” said Jesus Benito, Head Domestic Custody and TR Operations at SIX.
In the EU and the UK, industry-wide consultations about imposing shorter settlement cycles are happening, but the status of T+1 is not clear-cut. In the UK, a noticeable divide is emerging between those seeking to align closely with the US's T+1 timetable and those prioritizing coherence with the EU, even though the latter has not yet established a definitive date for implementing T+1.
One reason the EU is proceeding cautiously is the complexity involved in implementing T+1 across its 27 member states. While there is just one CSD in the US and Canada, there are dozens in the EU - each with their own systems, processes, and technologies. Few expect the EU to introduce T+1 until later in the decade, an outcome which could exacerbate market fragmentation.
With its direct market access capabilities across the US, Europe, and Asia, SIX is well positioned to support its international clients with their upcoming T+1 requirements in the months and years ahead.
Clearing Takes Centre Stage
Sparked by amendments to existing regulations and a possible recalibration of the central counterparty clearing house (CCP) business model, centralised clearing will undergo some major structural changes in 2024.
Given that 90% of euro-denominated interest rate swaps (IRS) are currently being cleared at a single UK CCP, the EU, in light of Brexit, felt this was a systemic risk, so has been agitating for more IRS clearing to be brought onshore. Proposed revisions to the European Market Infrastructure Regulation (EMIR) will require EU financial and non-financial counterparties to have active accounts at EU CCPs, together with minimum clearing quotas at EU CCPs for certain euro denominated OTC derivatives.
“With the new EMIR requirements, many financial institutions are now turning to SIX to support them with their IRS clearing obligations,” according to Jose Manuel Ortiz, Head Clearing and Repo Ops., SIX.
“It is not just conventional assets which SIX Clearing is looking to support. Following regulatory developments in the US, which saw the Securities and Exchange Commission give authorisation to a spot Bitcoin ETF, we expect investor appetite for digital assets, including crypto-currencies and security tokens, to accelerate in 2024. We expect more digital assets to be centrally cleared in 2024. This comes as SIX has developed its capabilities to clear crypto-currency-linked exchange traded products, a solution which will soon be extended to crypto-derivatives,” added Ortiz.
The ongoing debate about CCP interoperability versus preferred clearing and preferred interoperable clearing will continue in 2024. Demand for interoperability – whereby trading counterparties can choose which CCP they clear their trades with- is trending downwards, partly because some trading venues and exchanges have refused to open up. However, appetite for preferred clearing continues to grow. This is when both trading counterparties must choose their preferred CCP, but if they are not in agreement, then the trade is sent to a default CCP. A third option has since emerged – preferred interoperable clearing - which is when there are multiple preferred CCPs sitting alongside the incumbent CCP. Industry divisions over which clearing model to use are unlikely to be resolved in 2024.
Enhanced Stringency in EMIR Reporting Requirements
Updated EMIR Refit reporting obligations will consume a lot of resources at impacted firms. The new EMIR Refit reporting rules for OTC and exchange traded derivatives will go live in the EU on April 29, and then in the UK on September 30.
The changes are extensive.
Firstly, the number of reporting fields has increased substantially, from 129 to 203 in the EU, and to 204 in the UK. There is also greater specificity about how notional amount reporting is carried out, along with enhanced standardisation - with reports now being based on ISO 20022 XML standards. [i]
The UK and EU having different deadlines means institutions caught out by both sets of rules will have to comply with the new reporting obligations in the EU for a full five months before the UK provisions kick in.[ii] “The EMIR Refit reporting rules are imminent and financial institutions must pay close attention to what is happening. It will require firms to carry out a significant overhaul of their existing reporting practices to ensure compliance,“explained Thomas Steimann, Head REGIS-TR, SIX.
Securities Finance in an Era of Rising Interest Rates
The importance of having effective collateral management solutions in place will be further solidified in 2024.
Following on from a succession of interest rate rises, financial institutions are finding it increasingly difficult to finance trades and post collateral, with many now seeking out alternative funding sources, sometimes via the repo markets. With many organisations still wedded to manual processes, accessing the repo market can quite challenging.
As demand for collateral grows due to recent regulations (i.e. the rollout of Phase 6 of the uncleared margining rules) – coupled with the difficult macro headwinds – financial institutions are under mounting pressure. “Many firms manage their collateral through siloed middle and back offices using systems operating off different technology stacks. This creates complexity and stifles visibility, leading to costly human interventions and increases the chances of mistakes happening. Having sensible collateral management systems in place will become even more important in 2024,” commented Nerin Demir, Head Repo and Collateral Management, SIX.
The Stakes Are Rising in 2024
Shorter settlement cycles, regulatory changes, the push towards product diversification and challenging conditions for collateral management will have a major impact on the industry this year.
“Our industry is facing a lot of challenging headwinds as it moves into 2024, issues that will likely be compounded by complex geopolitics. It is essential that organisations engage with service providers with deep rooted expertise, a strong track record of innovation, and an extensive range of products and solutions, if they are to navigate some of these difficult market conditions,” said Javier Hernani, Head Securities Services, SIX.
[i], [ii] Simmons & Simmons – November 20, 2023 – EMIR Refit reporting changes – recap and timeline
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