The move towards shorter settlement periods in Europe and the UK is inevitable; the US and Canada are expected to move in 2024, and China and India are already following T+0 and T+1 settlement cycles.

The benefits of a shortened settlements cycle include increased efficiency, reduced costs, and improved risk management. T+1 will also improve overall market liquidity and reduce counterparty risks, creating a more secure environment for market participants to operate in.

Europe is currently studying the potential impact of such a transition and what firms in the capital markets industry need to do to address the barriers and enable a smooth transition. However, this is no small task—it requires all market players to come together and might need changes to technology, business operations, compliance, the legal framework, capital requirements, and more.

The impacts of T+1 on European markets

• Increased operational complexity: The reduced settlement period of T+1 will require key operations like allocations, confirmation, netting, and settlement instructions, among others, to be completed within the trade date, communicating across different systems, technologies, and geographies.
• Increased settlement fails: With less time to complete the key operations as mentioned above, firms will need to get it right the first time. In the short run, there is a possibility of increased settlement fails resulting in higher penalties.
• Impact on securities lending: Market participants will have to adjust the way they borrow and lend instruments, focusing heavily on mitigating counterparty risks considering the shortened settlement period and the resultant speed required to process inputs from key risk systems to assess exposure and default risks.
• Increased workload: Middle- and back-office teams handling trade confirmations, reconciliation, risk management, clearing, and settlement will experience an increased workload as they will have half the time they previously had to complete these processes.
• Impact on liquidity: Market participants will need to ensure the availability of funds within a shorter period of time to ensure a successful transaction. In addition to this, there is a need for RWA provisioning due to a possible rise in failed trades and the risk of penalties.

Automation will

The T+1 move will challenge participants, technology providers, and regulators alike to come up with scalable solutions that pave the way for highly efficient and optimised securities operations." - Shankar Sundaram, COO, LatentBridge

What will organisations need to do to prepare for this transition?

With 12% of all transactions failing, capital market firms have to take a deep look into their operations and technology support. Some areas that will play a significant role include:

• Technology: It is now imperative for firms to ensure their infrastructure and technology are up-to-date and can handle the increased volume of transactions and data that will be required under T+1, particularly for firms still using legacy and outdated systems. Adopting new technologies like intelligent automation can help handle many of the past challenges of data discrepancies and settlement instruction handling.
• Risk management protocols: This would include counterparty and collateral management. The shortened settlement period increases the risks to counterparties, and organisations will need to assess and update their counterparty and collateral management protocols to account for it.
• Legal and compliance processes: Organisations will need to review and update their legal and compliance processes to ensure they meet the new requirements under T+1.
• Communication and collaboration processes: Organisations will need to review and update their communication and collaboration processes with their trading partners, custodians, and other service providers to ensure they are aligned with the T+1 requirements.

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Automation at the heart of T+1

The main driving force behind automation in the T+1 settlement cycle is the need to reduce the risk of failed transactions and increase efficiencies by handling exceptions with a single, centralised point of control and management.

Various functions across the middle and back offices, like trade confirmation, clearing, and matching settlement instructions, can benefit from the automation of these processes, thereby reducing manual efforts and improving the accuracy of these transactions. Once automated, these processes can adapt rapidly to handle an increase in trade volumes and changes in regulatory requirements like the T+1 settlements timeframe.

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"Automation will become the lifeline of T+1." - Chandrakumar Ramasamy, Service Delivery Head, LatentBridge

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While trades fail for many reasons, like a lack of inventory or liquidity, a key reason is the lack of pre-matched trade instructions. A European Repo and Collateral Council (ERCC) report said 27% of all fails were due to errors relating to the matching of instructions.

With Setts:automated pre-matching, capital market firms can match settlement instructions, resolve exceptions in real-time, and track and manage all exceptions on one centralised dashboard.

The move to T+1 in Europe is likely, despite the potential for slow adoption due to the fragmentation of markets. While it brings its own set of challenges, organisations will leverage technology and automation to overcome some of the barriers and move towards increased efficiency, reduced costs, and improved risk management for all in the financial markets.