T+2 is due in 2015 in Europe, and the USA are already investigating T+1, so it looks inevitable that shortening the settlement cycle is well and truly on the development map. Regular readers will know my views on this so I won’t go over already trodden ground,
but the operational issues to achieve T+ whatever has to be addressed and a key is the ability to pay good value money for the asset. It’s hardly worth having a shorter settlement period if the payment cycle is running at another speed.
Now before the shouting gets too loud, bank to bank payments happen in T and there is no problem but when the proceeds of pay and receive happen via agents of investors the payment chain is elongated. Requiring faster communication of payment instructions
and allocations. This has to be processed from T date through the following day and paid the next, T+2.
The need therefore is to have far more efficient static data management throughout the payment chain and better communication between all parties in the chain. Remember SWIFT is standard in bank to bank but where web and even fax proliferate, in the retail
investing market. Indeed hardly any retail brokers, wealth manager or fund managers will be SWIFT enabled. This alone will require massive people interaction checking, matching and standardising each payment. Assuming the static data is 100% and the payment
details are 100% there may be an outside chance of the payments being where they should be on the contracted date of settlement. Anyone believe this possible?
What could bring about a realistic possibility would be for the retail market to use industry matching systems and invest in standardised messaging. If not carried by SWIFT at least utilising the industry standardised message construction. There are plenty
of vendors supplying message transformation technology bringing internal integration.
But the story does not stop there, as there is also a need to standardise the electronic identifications of counterparties and investors at fund account level, which is being addressed by the introduction of LEIs.
In Europe SEPA and the creation of T2S brings the possibility of cross-border payment efficiency.
Remember T+2 is coming in before T2S and SEPA is virtually here (I won’t go down that route either at the moment) so the possibility of achieving successful settlement in a shortened timescale is being created. Just not fast enough to meet the challenges
of making T+2 a workable change.
What’s clear to me is the need for a convergence of the treasury operations with that of settlement within, not only Investment Banks but also Brokers and Wealth Managers. The latency gap and the chiefdoms that exist in many FSIs have to be broken down and
converged if firms are going to achieve shortened settlement. Can this be achieved? Well like T+2, I don’t doubt the benefit but the costs appear to outweigh this and anyway since when have Turkeys voted for stuffing!
The Post Trade Forum in June will debate this and much more on the morning of the 26th at the London Stock Exchange.