Shortening the settlement cycle is a recurring process – veteran bankers will remember the arrival of D+5 in France in the 1990s, replaced by D+3 and then T+2 in 2014. Such a shift is natural, and it follows the industry’s progress in automation, rationalisation, and harmonisation. So how is this new iteration such a big challenge? Sylvie Bonduelle, senior adviser (public affairs), Societe Generale Securities Services, writes.
Until now, time compression has been measured in days; this time, the unit of measurement is hours. With T+1, all the steps between executing a transaction and being supported by a CSD1 should be performed in a few hours.
Indeed, a transaction concluded on T will have until T+1 +/- 4 pm to settle, so one might be tempted to dismiss such constraints as “unnecessary” and consider the value of forcing everything in just a few hours. But this would be to forget the important role played by the night cycle (for the CSDs that propose it) in the overall process. In its most advanced version, this is the time in the “settlement day 2 ” when optimisation is strongest. The industry has understood this and has made the non-degradation of the current process the starting point.
Where do we stand?
Several working groups have been set up to better understand the impact of T+1 and to define the prerequisites, adaptations or changes to be made beforehand. While many ideas have emerged from this work, they are still in the form of proposals and even questions, as each link in the chain of post-market actors will have to be able to rely on others to be able to move to T+1. What is the point of a settlement process without instructions? Favour Affirmation Platforms? Why not, but on the condition that they take up at their level the matching criteria applied by the CSDs.
1: Central Securities Depository
2: The settlement day starts the day prior to the agreed deadline
Eyes on 2027?
Propelled to the forefront – probably echoing announcements across the Channel3-, 2027 has become the watchword, the starting point for a retroplan that the industry (including infrastructures) should establish. Suppose it is necessary to set a date quickly because it gives visibility and priority to other work. In that case, it is still necessary to do it once the first elements are in hand (the order of magnitude of the adaptations, the division between the “nice to have” and the “must have” In the latter category, mention may be made of the scope of transactions which would be subject to the requirement of a settlement at T+1. To move forward, the industry has assumed that it would be the same as the switch to T+2 in 2014, but we cannot be sure of that today. A difference could call into question certain conclusions.
Alignment with the UK (tipping over to the same date) is put forward to explain the choice of 2027 and undoubtedly the coexistence of two settlement cycles will have consequences. But what matters is a successful switch, and it is difficult to say right now whether 2027 is achievable or not. It is worth noting that it will have taken the US a little over three years (and perhaps enough for the UK) to shift to a single market and therefore question the feasibility of the same timeframe in the context of almost 30 markets and associated infrastructure.
Above all, setting a date without having all the elements could lead to a situation where the accepted adaptations would be “minimal” versions (the part that would hold within the time allowed) with the risk of moving to T+1 in a situation requiring manual interventions, tools and processes that are not completed. Settlement efficiency after the noticed efforts of the industry following the implementation of CSDRs4 could actually be degraded by such a decision.
At the very least, in order to plan for 2027, it is becoming urgent to have certainty and to implement governance that brings all post-market components together around the table. Unlike its predecessors, this new shortening can be achieved only if all players contribute their part. The T+1 shift’s motto could then be summarised by Alexandre Dumas’ Trois Mousquetaires’ rallying call “One for all, all for one” (and potentially also having the UK on board).
3 In particular in the « Geffen » report: Accelerated_Settlement_Taskforce_Report.pdf (publishing.service.gov.uk)
4 CSDR: Central Securities Depositories Regulation (2014/909) on improving securities settlement in the European Union and on central securities depositories
Sylvie Bonduelle has been working in the post trade environment for over 20 years where she has held various positions in IT, Production and presently Public Affairs. Within the Regulatory Watch team, she is in charge of the follow-up and analysis of regulatory and industry initiatives related to the post trade activity and to financial market infrastructures, currently MIF2, EMIR and EMIR review, CSDR, FTT, CCP recovery and resolution or ECMS (the ECB’s collateral project). Sylvie is a member of several trade associations’ permanent working groups (AFME, ICMA, AFTI, AMAFI).
