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T+1 Settlement: the global impact of shortening the cycle

Time is of the essence in the global securities markets. It may be a reliever for you, as many securities markets operating across the globe are shortening their securities settlement cycle from the date of execution(T+2) to just one single day, T+1 Settlement. Though it is enticing news for many participants, how well prepared are market participants for this switchover? What does this shift bring to the table? Are they on track for the transition? How are they prepared for the automation to drive their post-trade processing in a T+1 world?

T+1 Settlement: the global impact of shortening the cycle

Why does the T+1 settlement matter?

Shifting to a T+1 settlement cycle primarily aims to mitigate pre-settlement risks arising from counterparties failing to meet settlement deadlines.

Why does the T+1 settlement matter?

This move helps manage risk by aligning with the practice of clearing transactions through central counterparties (CCPs). Consequently, the reduction in the settlement timeframe leads to decreased margins and a subsequent decrease in the required capital. This enhances capital efficiency, bolsters liquidity, and results in cost savings. The US Depository Trust & Clearing Corporation (DTCC) approximates that eliminating one day’s exposure to risk could potentially result in a 41% reduction in the volatility component of CCP margin requirements. Any entity failing to be ready by the deadline will have severe impacts on its business. Our IMS trade process solution is designed to streamline your processes in an effort to reduce risk and strengthen and modernize the securities settlement cycle.

Advantages of T+1 Settlement:

Below shared are the perks of experiencing the transition from T+2 to T+1 settlement.

Improved Counterparty Risk Management:

Improved Counterparty Risk Management:

The shift from T+2 to T+1 settlement implements a shorter settlement period, reducing pre-settlement risks and counterparty risk management.

Enhanced Liquidity in Capital Markets:

Enhanced Liquidity in Capital Markets:

T+1 settlement will substantially improve market liquidity by making funds easily available from transactions for the participants. This enhances liquidity benefits for market participants, promotes a more dynamic, and builds a responsive capital market ecosystem.

Reduced Margin Requirements:

Reduced Margin Requirements:

T+1 settlement leads to lower margin requirements for both buyers and sellers. This reduction in margin requirements frees up capital for market participants and minimizes their exposure, contributing to a more efficient and secure trading environment.

Efficient Capital Deployment:

Efficient Capital Deployment:

The faster settlement cycle of T+1 accelerates capital turnover. This, in turn, enables quicker capital reinvestment, facilitating more agile liquidity management and optimizing the deployment of financial resources.

Explore the readiness of market by regions:

So, as the world gears up for the US move to T+1, we have curated some facts by examining the likely impacts of this transition on different regions.

Allow us to show them!

Americas

The world's influential and substantial liquid capital market, The United States, is proposing 28 May 2024 after the Memorial Day holiday — as the implementation date for T+1 settlement for all transactions in US equities, corporate debt, and unit investment trusts. In fact, Canada is in pursuit of making the change the day before to stay aligned with its neighboring countries. While the stock exchange's trading hours (09:30-16:00) remain unchanged, the post-trade processing landscape will undergo a shift under the new rule. Broker-dealers must now complete most of the post-trade processing on the trade date to meet the 21:00 affirmation deadline. Transactions failing to settle during the overnight cycle will result in elevated DTCC charges. Additionally, registered investment advisors are now responsible for documenting the precise time and date for each confirmation, allocation, and affirmation.

Asia Pacific Regions

In January 2023, Indian exchanges successfully completed the gradual monthly transition from a T+2 to a T+1 settlement cycle. This brought India in line with China, where securities settle T+0 and cash settle T+1 on the exchange markets. Early feedback suggests that implementing T+1 in India was a victory for the capital market, yielding efficiencies and encountering no notable issues. At a macroeconomic level, the reduction of settlement timeframes contributes to diminishing overall risk within the financial system. This is achieved through a decrease in margin requirements and a mitigation of pro-cyclical margin and liquidity challenges. Market participants stand to gain substantial advantages, including a diminished exposure to credit, counterparty, and operational risks, as well as the expeditious settlement of transactions.

Europe

Achieving a T+1 settlement cycle poses a complex challenge for Europe due to the absence of a unified market operating under a harmonized legal framework and a consolidated infrastructure for post-trade processing. The region encompasses diverse markets functioning under a multitude of rules and operational nuances, creating a fragmented landscape for trading, clearing, and settlement. The substantial challenge underlying settlement inefficiencies arise from the need for more standardization and automation across markets before the settlement occurs.

Conclusion

A concerted and industry-wide collaboration is essential to address these shortcomings and enhance post-trade efficiencies. This collaborative effort should involve active participation from all stakeholders in the transaction chain, including investors, intermediaries, custodians, and market infrastructures. This holistic approach is crucial for fostering harmonization and overcoming the complexities associated with achieving a T+1 settlement cycle in the European context.

How Our T+1 Solutions Can Transform Your Operations?

Our products are specifically crafted to facilitate a smooth settlement process and enhance accessibility within a T+1 framework. This is achieved by integrating Securities View, which employs UTI (Unique Transaction Identifier).
Securities View is pivotal in delivering real-time visibility into security transactions, encompassing trade confirmations, settlement instructions, and status updates. Every security transaction receives a unique UTI code that enables streamlined communication and automation among various stakeholders involved in the settlement process. This systematic approach significantly reduces errors and the need for manual intervention, which is particularly crucial in the accelerated T+1 cycle.
IMS Trade Process Platform is integrated with Swift API Services to leverage the facilities of Securities View and UTI, thereby gaining access to the real-time status of every trade awaiting settlement. Streamline your processes and enhance efficiency with our forward-looking solutions.
ECS’ T+1 settlement solution is designed to seamlessly integrate your existing systems with ZERO disruption, ensuring a smooth ride. Our IMS Trade Processing Platform has engaged UTI (Unique Transaction Identifier) in its Trade Settlement Messages, facilitating adherence to a T+1 settlement date, thereby actively contributing to the T+1 movement and providing institutions with the necessary support for a seamless transition.
We focus on developing an automated system that comprehensively addresses technology systems and data across all product categories. This includes handling reference data, standing instructions, corporate actions, securities lending, repo, collateral, liquidity management, trade funding, and payments.
Our solution enforces full lifecycle data transparency by providing real-time visibility, mitigating risks, and enabling efficient reconciliation.
Get relief from the constraints of outdated settlement cycles. Embrace the forward momentum of financial operations with our T+1 solutions, designed to reclaim valuable time for your organization. Your future awaits you.