The European market is ready to implement a T+2 settlement time, following the EUs bid to standardised the settlement timetable for member countries, says a range of custodians and market experts, when speaking exclusively to Global Custodian.
“I do think most of the market can accommodate T+2 very quickly and it wouldn’t present a huge amount problems,” says Tony Freeman, Executive Director of Industry Relations at Omgeo. “There is a significant chunk of time to prepare for these services but the issues to look at are the processing of FX, securities lending and operations.”
In the latest set of European Commission (EC) Consultation papers, the EC says it wants Europe to move to a standardised settlement timetable of T+2, which has proven to have mixed reactions around Europe.
“T+2 is an evolutionary step for the markets, says James Cunningham, European Market and Regulatory Initiatives at BNY Mellon. In the past, markets have moved from a T+10, to a T+5, and now very largely to a T+3 cycle; a further move to T+2 is not a radical change. By contrast, if we were to move into T+1 – that would be revolutionary. T+2 is broadly acceptable and is something that isn’t too much of a market burden. I am not saying that no one will be affected but it is certainly not unmanageable.”
Currently, there are markets round the world, some in Asia, that stick to a T+2 settlement time and market participants believe that at this stage, the most important element to mitigate risk and impact is to raise the awareness of the likely introduction of T+2 in Europe as early as 2013, says Werner.
While consensus shows that the T+2 scenario is doable, experts say unintended consequences could happen.
We believe that implementing T+2 for ‘on-order book’ business would require minimal changes, says Diana Chan, CEO of EuroCCP. The largest impact will be on OTC flow where the timing of allocations and confirmations could create delays and mean that matching at the CSD cannot meet the new deadlines. Unless addressed, this would lead to an increase in fails and possibly increase borrowing costs and fail fines. There is also a broader impact on the ability to hedge if Europe moves to T+2 and other global markets remain on a longer settlement cycle. This situation could also create market arbitrage opportunities as an unintended consequence.
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(LB)