This paper discusses the progress made towards T+1 and instantaneous settlement in financial markets, and industry preparedness for such a change. We cover the various equity settlement technologies and analyse how collateral, stock lending and margin requirements can impact the settlement processes. The debate on shortening the equity settlement cycle is discussed, along with potential policy recommendations based on industry preparedness. The findings of this study will help stakeholders identify gaps in their current settlement processes and develop strategies to meet the demands of accelerated settlement.
There are benefits accruing to broker/dealers and associated custody businesses from reduced counter-party risk, lower settlement margins and for wealth and fund managers, the improved access to funds for custom.
Technology is a key issue that needs to be addressed as the readying of firms for straight through processing is essential for not only improving the ability to comply with accelerated settlements, but also introducing huge benefits in terms of efficiency and operational risk reduction.
The arguments for accelerated settlements are strong, markets such as India are already on a T+1 cycle and mainland China using a T+0 cycle for delivery vs payment settlements and the benefits can be seen. However, our research shows that acceleration can come with significant costs, and, maybe less intuitively, risks, given the need operate seamless settlement processes.
Clear steps need to be taken to implement the migration to accelerated settlement processes:
– Automated affirmation and straight through processing levels must dramatically increase to ensure that current high levels of settlement efficiency.
– Work to remove batch processes, especially overnight batches which will not meet the new deadlines.
– Remove nonstandard instructions and paper from as much of the system as possible.