SETTING THE PACE.
Brian Godins, managing director, global head equities operations, HSBC explains how the industry and the bank are preparing for T+2.
How are things progressing on the move to T+2 in October?
It is a busy time for regulatory change, with implementation of wide-ranging initiatives such as Dodd-Frank and EMIR filling much of the calendar. T+2 is being driven by another piece – the Central Securities Depository Regulation (CSDR) – so there is a challenging workload to be completed in a short space of time.
CSDR is moving forward with a good degree of traction and the European countries which are impacted are focusing on switching from a T+3 to a T+2 settlement cycle on 6 October. A larger number of countries, approximately 24 at last count, are looking at the shortening of settlement cycles either at the same time, or at some point in the not too distant future. While this is not a completely new concept for markets in Germany, Slovenia and Bulgaria (which already trade on a T+2 basis) the transition will undoubtedly be challenging for countries making the move.
What are and will be the greatest challenges?
It depends on what type of market participant you are. Many say it will be easier for broker-dealers,central counterparties (CCPs), exchanges, Central Securities Depositories (CSDs) and custodians. It will likely be the asset managers, hedge funds and other buyside participants who conduct portfolio valuation and performance around a T+3 and T+4 settlement cycle who will be the most affected. They will have a lot of work to do in terms of changing their operating models and valuation systems to provide same day affirmations (SDAs). Firms that cannot do this may find themselves at risk of being fined. This has been a great opportunity though for vendors who have a wide range of post trade solutions and can help fill a gap.
Another challenge is the effect it will have on the global client base of European markets. Most broker-dealers offer distribution channels where their executing entity is often very different from the contracting entity. It will put extra pressure on firms who manage these cross border transactions in different time zones and highlight the quality of the trade date processes in a shortened settlement cycle.
As the move to T+2 draws closer it actually appears as though one of the biggest challenges and hurdles will be how T+2 impacts the derivatives world.
How will T+2 impact the derivatives world?
It’s interesting that over the last couple of months people have moved from thinking about the scope of products and markets for securities, to ‘what does T+2 mean for the business’ and ‘what does T+2 mean for the derivatives landscape’.
As it stands there is every expectation that the physical exercise of a stock settlement on the back of a legacy OTC contract will be T+2, and naturally the same for new contracts entered in to post T+2.
There is also a growing momentum and sentiment around legacy equity swaps – where the underlying markets will move to T+2 – that the events should also move to T+2 (for example resets and terminations). The additional question as it stands is what action should be taken on these legacy trades? Should each firm close the existing contract, re-open it and reconfirm or should all legacy swaps have their existing contracts updated and re-confirmed?
This will actually probably become much clearer.
Do you think we will see existing utilities offering more services for data, or new ones being created to help meet the challenges?
The quality and integration of data is central to these and many other regulations and I think they will evolve over time as utilities are inherently data driven. There is significant momentum in the utilities arena, evolution of existing utilities and creation of new ones, all looking to capture a sweet spot in the marketplace to solve industry challenges.
What is still fascinating is that if you took a sample of people from the industry across vendors, exchanges, institutions and others, you would probably get many different definitions and interpretations as to what ‘utilities’ means to them, but the common word would more than likely be ‘data’.
What is your role at the Association for Financial Markets in Europe (AFME)?
Over the past 20 months I have been working with AFME as part of the Post Trade division, chairing the Transaction Management Committee (TMC). One of the things the committee has been focusing on is looking at the prioritisation of initiatives, given the limited time everyone has at their disposal, and in particular the benefit and value-add versus the effort that is being put in.
At the time I joined, the broker-dealer committee was already actively working on a set of deliverables in the post-trade services space. This included a set of standards and documentation around SDA (same day affirmation), matching, allocation and confirmation for the securities product with a focus on cash equities and CFDs (contracts for difference). The goal for the committee is to influence, guide and move the industry forward in addressing the inefficiencies and lack of completeness in the T0 processing space. It’s the old adage that if you get the booking right at point of execution, either through quality of booking and/or trade date affirmation, matching and so on, then the problems downstream dissipate into thin air. Easier said than done!
The committee on which I sit has been working tirelessly on developing standards for the executing broker (EB) to EB flow, EB to prime broker flow and EB to buyside communities. These are an eclectic mix of flows with some commonality and some real ‘devil in the detail’ differences. The added catalyst of T+2 on the immediate horizon has given us the added ‘oomph’ to continue to push SDA in the marketplace. We will continue to provide clarity and guidance on these standards and expectations, to make this as mature and transparent a model as possible.
Turning away from the industry plans, what have you been doing at HSBC to prepare for the changes?
As this regulation touches many parts of HSBC, we have set up one programme covering all areas of the group. This allows us to run the programme efficiently if there are common requirements and also share best practice.
We look at all the European regulations to assess the impact they have on an individual and collective basis at the bank. For example, we have a working group on the post-trade securities environment which has representation from across the businesses. This allows us to focus on the bigger picture, and broader implications for the organisation.[Biography] Brian Godins assumed the role of global head of equities operations in 2013 having performed a number of fixed income and equity related line and change roles in HSBC over the past five years. In addition to his HSBC responsibilities, Godins is currently the chair of AFME’s Transaction Management Committee. He previously worked at Morgan Stanley for 13 years in line and change roles in securities, derivatives and FX, across market counterparties, institutional and prime brokerage clients.
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