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.