T+1 for equities will be standard within five years, according to a new White Paper – Securities Services Evolution – from Citi.
The paper includes quantitative and qualitative data gathered from 15 financial market infrastructures (FMIs) and almost 400 market participants including banks, broker-dealers, asset managers, custodians and institutional investors across Asia Pacific, Europe, Latin America and North America.
It showed that around 50% of respondents predict that immediate settlement will be achievable within five years, and 46% see emerging technologies, such as distributed ledger technology (DLT), will be a key enabler.
Citi found that settlement compression continues to be one of the most pressing issues for the equities post trade industry, with the planned transition to T+1 in the US, together with the recent global volatility spikes.
The global bank also noted that half of market participants (57%) would require some investment for additional capability to accommodate any reduction in settlement cycle while only 29% believed that their existing technology would be adequate.
While the pandemic has accelerated and condensed many existing efficiency and digitisation initiatives, it has also given rise to a “whole new set of previously unforeseen challenges”, Citi says, including managing through periods of higher volatility.
The study pointed out that this combination of factors are driving market participants to re-examine how the settlement process could be accelerated and simplified to reduce risk. However, there are differences between the two groups.
FMIs see the major benefit of cutting settlement cycles as risk reduction, which will in turn enable lower margin requirements and the release of capital.
Moreover, 44% ranked greater efficiency in investment and trading processes as the greatest benefit of a shortened cycle for their respective organisations.
Most FMIs interviewed did not consider technology as a barrier to settlement compression as they had already undertaken considerable planning and investment during the last transition (from T+3 to T+2).
Market participants however had an opposing view, with almost 50% indicating that upgrading legacy technology would be a key issue.
It noted that the greatest obstacle to achieving a shortened cycle from a FMI perspective was business process efficiency and alignment, in contrast to market participant respondents whereby only 10% ranked this as a primary key factor. They ranked cash, funding and liquidity management as the greatest hurdles
Most FMIs did not view DLT as necessarily essential for settlement compression, but drew a distinction between T+1 and T+0, only seeing a role for it concerning the latter.
However, 64 % of market participants believe a DLT-based market infrastructure would significantly or moderately improve overall market efficiency and reduce co
Okan Pekin, Citi’s global head of securities services, says: “Through extensive dialogue with our partners and clients, it is clear that there is an increased need in the industry to strengthen resilience, reduce risk and costs; and enhance efficiencies.”
He adds: “This paper not only highlights the benefits and challenges for a shortened settlement cycle, but also the associated emerging technologies and digitalisation efforts underway across the industry.”
Matthew Bax, global head of direct custody and clearing at Citi, comments, “We need to adapt to seismic shifts across every region by digitally transforming to deliver best-in-class experiences seamlessly across platforms for our clients, at scale.
“We have a deep sense of accountability for our clients, partners and network and are committed to providing post trade services through our network with global consistency.”
Daniel Carpenter, head of regulation at Meritsoft, a Cognizant company notes that “The drum beat for T+1 continues as the industry assesses the impact of recent events on global markets. With the report highlighting the investment and innovation needed to accommodate a shorter settlement cycle, the prospect of T+1 poses important questions, not least around the Settlement Discipline Regime.”
He adds, “While the move to T+1 has some clear benefits, market participants would be under ever-greater pressure to ensure timely settlement if they are to avoid penalties and, potentially, costly buy-ins. Improvements in processing capabilities must also meet the challenges around recovery of interest claims on failed settlements which may well be ramped up by a shorter settlement cycle.”
Joakim, Strömberg, head of triResolve solutions at TriOptima – part of post-trade solutions provider OSTTRA, says, “These findings show that the ongoing drive to reduce settlement times is still held back by manual and onerous tasks. Take the issue of collateral settlement as a case in point. This task often requires firms to log into a custodian’s portal or to use a fax. There needs to be an industry wide push to remove the headache of connecting to multiple custodians, helping clients to lower transaction costs and significantly reduce settlement risk.
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