27 August 2014

Gary Wright

Gary Wright - BISS Research

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Risks in shortening the settlement cycle

01 May 2012  |  3046 views  |  2

Years ago when the UK markets moved from T+5 to T+3 there was plenty of research about the benefits gained in risk reduction. There was doubt about the actual risk benefits because although there was obviously a reduction in possible default risk and market risks, there was a considerable increase in settlement failures and all the risks associated, not least being cost.

T+2 brings into question once again, is the reduction of risk of possible defaults, more beneficial than contractual settlement? What is good settlement?

As an experienced settlement man it was always ingrained in me that good settlement was settling on the contracted date, thus allowing proceeds to be allocated wherever the client wished and that failures would cause an increase in costs, risks and client dissatisfaction.

Today, settlement systems and in the UK, the excellent CREST system, have increased successful settlements to a very high level. At least in T+3 terms and this performance may have given confidence that shortening the settlement cycle to T+2 is possible. I am not sure the market, post trade clearing and settlement processes, can measure up to T+2 without considerable upgrading of systems and processes, and just as importantly the speed to which people have to work and respond to investors. The risk in moving to T+2, in my view, is still in balance with the increased risk if settlement failures increase.

T+2 is obviously a reaction to the credit crisis and subsequent industry problems, along with the global economic maelstrom we are all trying to swim away from. However, is it a change that has to be made now? T2S is heading our way and there is a necessity to standardise settlement in Europe but surely there are far more other important changes the industry should be making, than a settlement cycle that currently works well and that has doubtful benefits of changing. Will T2S be beneficial for the market and investors?

 

 

TagsRisk & regulationPost-trade & ops

Comments: (3)

Nikhil Mittal - Infosys Ltd - Richmond | 02 May, 2012, 10:55

I am more keen on looking at it from an integrated point of view where at many key places of the world, the settlement cycles differ with one another.

With UK coming to T+2, it would be mostly in sync with Germany, but would differ with US and Canada who still practice T+3. The Asians are more incoherent with cycle ranging between T+1 to T+3. Post-crisis nature of the trading activity has become more delicate and with European economy loosing confidence as a whole, the movement to T+2 by UK should be evaluated carefully at systemic levels.

While it might be in accordance to Basel III norms of reducing counterparty risk exposures and also reducing costs of transactions among the presently incoherent economies, the need of the hour is a careful evaluation of acceptance for such a step in terms of global harmonization.

A Finextra member | 02 May, 2012, 11:23

Well i think it is a straight equation. Is increasing settlement fails with increased costs of financing and potential increased risks of systemic fails because a log jam of failed settlements increases counterparty risks worth it?

There is no point having a global standard settlment time frame if it increases risks and costs and markets can not comply

Nikhil Mittal - Infosys Ltd - Richmond | 02 May, 2012, 12:10

SDA should be more rigorously implemented in order to reduce any risks. I am sure that has the potential to become a global standard in itself.

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name

Gary Wright

job title

Analyst

company name

BISS Research

member since

2007

location

London

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