Financial Market Revolution: Introduction of T+1 Settlement System
### Transitioning to a T+1 Settlement Cycle: Embracing Change and Overcoming Challenges
In the rapidly evolving world of finance, a significant shift is underway: the adoption of a T+1 settlement cycle. This change, which moves the settlement of trades from two business days to one, is set to revolutionise the capital market industry, impacting various market participants and segments.
#### Key Changes for Market Participants
The T+1 transition extends beyond settlement cycle and instruction processing, affecting all levels of the industry. Market participants must prepare for several key changes.
Firstly, internal systems updates are necessary to handle real-time trade processing and accelerated settlement cycles. This involves updating technology to support rapid trade execution, confirmation, and allocation.
Secondly, operational workflow adjustments are required. Clearing and settlement operations need to be streamlined to accommodate faster trade affirmation and allocation processes. Custodian banks must adapt their systems for T+1 settlements, focusing on corporate actions and reconciliations.
Thirdly, collateral and margin management will be impacted. Participants must assess these impacts to ensure efficient collateral usage.
Lastly, regulatory compliance is paramount. Trading venues must review and update their rulebooks to align with T+1 requirements, ensuring market integrity and minimising errors.
#### Impacts on Securities Lending, Repo Market, and Funds Management
The T+1 cycle will require operational efficiency improvements across various market segments.
In the securities lending sector, faster communication between lenders and borrowers will be necessary, with stricter deadlines for recalling securities. Participants will need to enhance their systems to manage the tighter settlement timeframe.
The repo market will also undergo significant changes, necessitating infrastructure upgrades and process redesigns. This could transform how repo transactions are executed and settled, potentially reducing costs and increasing transparency. However, managing liquidity under the T+1 framework poses challenges.
Funds will face challenges in managing their liquidity and risk under the shorter settlement cycle. They must ensure they can source funds and settle transactions more quickly. Operational efficiency will also be a focus, requiring more efficient use of collateral and better risk management strategies.
#### Embracing the Change
Transitioning to a T+1 settlement cycle requires significant operational, technological, and strategic adjustments. It promises to enhance market efficiency and reduce settlement risks but also poses challenges in terms of infrastructure, liquidity management, and operational efficiency.
Societe Generale Securities Services, a leading player in the industry, is actively participating in European working groups regarding T+1. They are sharing their views and enhancements through webinars and attending conferences, aiming to facilitate a smooth transition.
Efficient funds shares management for Standard Funds or ETFs is necessary for T+1. Automatic position realignment mechanisms are required, and standardised and synchronized sealed keeping protocols for multi-listed parties should be adopted, including MIC code and place of settlement (PSET).
Intraday liquidity pools need to be developed for T+1 transactions, and CCP/Clearer and Clearer/Broker data flow processes must compress to allow overnight settlement. Between investors and brokers, allocations/confirmations need to be streamlined, eased, and done in a shorter timeframe, reinforcing the CSDR framework.
Transfer agent and Fund administration/accountant activities require deep reviews for T+1. Adapting to the accelerated timetable is a significant challenge for market participants, involving IT enhancement costs and more efficient post-trade processes.
In a T+1 context, real-time positions monitoring is required for multi-listed financial instruments. Automatic call time arrangements for securities lending are needed, and additional challenges in managing positions are envisaged, particularly for market makers.
The transition to T+1 will have significant impacts on securities lending and the repo market, requiring adjustments to operational flows, collateralization strategies, and liquidity management. End of trading hours will need to be reviewed to accommodate the new settlement cycle, affecting late execution trades.
In conclusion, the shift to a T+1 settlement cycle is an opportunity for the capital market industry to enhance efficiency, reduce risks, and adapt to the evolving needs of the modern financial landscape. While challenges abound, with collaboration and innovation, the industry is well-positioned to embrace this change and thrive in the T+1 era.
Market participants in the business realm, particularly in finance and investing, must prepare for operational workflow adjustments under the T+1 settlement cycle, such as streamlining clearing and settlement operations and updating technology for real-time trade execution. Funds, for instance, will face challenges in managing liquidity and risk under the shorter settlement cycle and need to ensure they can source funds and settle transactions more efficiently.
