The next stage of the global transition to T+1 settlement has been reached with the publication of the Interim Report and draft recommendations of the UK Accelerated Settlement Taskforce (AST) Technical Group. We examine the impact across the financial industry.
Conclusion and actions
It is a call to action:
- To our European neighbours – come join the UK in this move!
- To regulators – you have a tool to legislate this more readily, use it now!
- To associations and FMI – drive the change forward!
- To infrastructure and market participants – embrace automation and efficiency!
To meet this call though, activity will need to be initiated soon by firms, to understand their processes and technology better (when was the last time that the processes were actually reviewed?) and prepare for changes.
The move to T+1 doesn’t trigger any new volume of trades, but some of its implications and recommendations means that internal flows will increase, prioritisation of exceptions will be more important and there will be some systematic changes to how the market works (notifications for example). Firms will need to think about these now and challenge the implication that this will be easy.
Here's a little more detail:
Scope:
The AST Technical Group has been clear on the scope, reviewing and narrowing down the list of impacted securities. This is a valuable step as one of the challenges that dogged the US T+1 move was the delays in confirming the scope, only agreed months before the due date. This upfront approach allows firms to understand and plan their approaches based on a well-defined product scope.
Particularly interesting is the requirement for ‘safe harbours’ for those securities that are traded in the UK but settle outside the UK. These are interesting for three reasons. The first is the requirement for venues and CSDs (and participants) to differentiate these securities and treat them differently. The second is that the regulators will have to carve out (via secondary legislation) new rules to ensure that this happens. The third reason is the implication that if Europe moves at the same time as the UK, much of that activity would be rendered moot and no longer required.
Essentially though the taskforce lays out its stall neatly. Consultation is in progress, but there is little to fault the taskforce in setting expectations to all parties, regulator, venues and participant alike.
Timelines:
As ever the devil lies in the detail here – the final report will need to be clearer on dates, but the recommended end date of the transition remains 2027. Whilst generous (you will recall the US gave themselves 15 months), this time will swiftly disappear as regulators agree changes, firms understand the implications and prepare for the change and plan testing and go-live.
However, research in the US shows that it is far from over for US T+1 projects, with some reports showing at least 25% of T+1 projects ending in 2025 or later. The spectre of planning cycles in firms, plus the challenge of resourcing means that firms should prepare for this soon – if only to understand the impacts on operations and technology and secure the funding for projects.
The recommendations:
There’s much here, from ensuring that there continues to be coordinated industry input over the changes required, to more detailed references to activities in firms themselves. What is clear though is the understanding of the differences between a T+1 in US markets to one in the European and UK markets.
What to do now?
Regulators will be key in helping define the solution and getting momentum behind the transition, and the report makes it clear what the taskforce thinks this is, without demanding that every action in firms be monitored. Codes of conduct and the ‘soft’ power of the regulator will probably be the key here, with the threats inherent in “Dear CEO letters” that have driven positive activity elsewhere such as LIBOR transition.
Associations are given activities too, from how they interact with members (we assume they’re extremely busy gathering feedback as we write) but critically much of the change is left in their hands around driving market practice. In a positive way this shows the importance the UK market has on consensus as a tool to change behaviour – firms don’t have to do it this way, but the associations will help drive better (and swifter) behavioural change in the market and make sure that it remains competitive, without the need for heavy handed regulatory rulings.
FMI has a great deal to think about and are specifically targeted by several recommendations. Their role is at the heart of this, from venue to CSD, and changes to rules, processes, policies and technology will need to be in place and absorbed by participant firms. This means that they are first in the line for understanding and delivering the key changes required to make T+1 successful as some of their changes may trigger participant changes in response. There is also a role to play here in strengthening the role of data providers – delivering market wide identifiers and up-to-date static data will help participants with the compression of the trade lifecycle.
Market participants changes obviously are key in the recommendations. From examining their processes and technology to make sure they can absorb the compressed cycle, through understanding the wider implications due to the UK market (collateral, securities lending, repo and FX), to communication to the wider audience. This is going to be critical to success with the mainly exception based processes over STP systems that participants use and will challenge firms to maintain the high STP rates necessary. A failure to do so will mean that firms have to deal with exponential demand on operational resource.
Larger firms obviously have a lot to do, but smaller firms are also impacted – not least to ensure that market practices are adhered to! No doubt many firms are already reviewing the recommendations and preparing their response to the consultation. The standout from the US experience was the lack of automation before go-live date due to lack of time leading to greater instances of remediation. So firms should start reviewing, understanding impact and planning now irrespective of the final date. The benefit, though, is that the changes are useful in themselves leading to greater efficiency, lower running costs post tech implementation, better reporting leading to improved control and risk management.
