A new article from Vermiculus and GreySpark Partners describes the impacts of North America’s shift to T+1 settlement on international financial institutions. It is available here.
The short answer, if you are pressed for time, is a lot.
The shift has good motivations. Pandemic-induced market volatility and the meme stock craze exposed investors to unnecessary counterparty risks. Shortening the securities trading settlement period would, in theory, reduce those risks.
Settlements and allocations for T+2 settlements had to be completed before 11:30 the day after the trade. Under T+1, allocations had to be done by 19:00 and affirmations by 21:00 on the trading day.
“The major implication of this is that after-hours work is needed by back-office staff to enable the trade to settle before the T+1 deadline,” the article states. “For counterparties in other parts of the world, T+1 settlement imposes a much tighter timeline.”
Non-uniform settlement periods around the globe add wrinkles. Only North America, Argentina and India fully use T+1. China uses a hybrid of T+1 and T+3, while many others use T+2.
Digital ledger technology makes real-time settlement a reality. That would further reduce risk and foster closer integration with crypto markets
Because of time differences, US T+1 has reduced Europe’s and the United Kingdom’s settlement windows. Elapsed time and actual working hours differ, with the latter being much lower. In many cases, there is only three hours of overlap
“This constriction of the trading hours available for allocations is heaping pressure on post-trade divisions and, in particular, leaving less time to source and execute corresponding foreign exchange (FX) transactions,” the report adds. “Cash management processes to ensure that correct funding is in place for settlement are compressed into a shorter period. More settlement failures could lead to a contagion of counterparty risk spreading through the capital markets ecosystem – for example, if a participant is expecting to receive securities or cash on a particular date and does not, because of a counterparty failing to settle, then there is a risk that the affected party will be unable to meet their own obligations with other counterparties on the same date.”
The reduced period could actually add risk due to added complexities and time pressures, although settlement rates have so far improved since the switch.
Asian-American trading faces similar issues, with Friday trades forcing Asian firms to work on Saturdays or to outsource it to another time zone. APAC-European trades are impacted by a shorter period, especially as volumes rise, because it leaves less time for due diligence.
The article finishes with a challenge to the industry:
“The instant settlement finality and the 24/7 nature of crypto trading have set the bar for traditional trading technology and processes. The question firms must ask themselves is how they can enhance traditional post-trade systems and processes to reach that bar or, alternatively, how can tokenization and crypto trading merge with traditional post-trade systems.”