In a recent industry webinar hosted by Omgeo on the Countdown to T+2, a panel of sell-side, buy-side and other industry participants discussed the prerequisites for the achievement of shorter settlement cycles across Europe. These operational prerequisites include higher levels of automation across the industry as well as securities lending processing, harmonisation of trade fails and faster confirmation of trades – something we refer to as Same Day Affirmation (SDA).
The need for higher levels of automation on the buy-side was a theme that reoccurred throughout the discussion on T+2. Historically, the buy-side has been less focused than the sell-side on automation of middle and back-office functions. Whilst some buy-side firms have made significant progress in automating trade lifecycle processes, overall, there remains a surprisingly large amount of manual processing in settlement stages.
Shorter settlement cycles which require greater automation as a prerequisite for implementation should have a substantial impact on the operational efficiencies of medium to smaller sized IMs and the brokers and custodians who service them. In truth, the buy-side driven by the need to fulfill best execution obligations set by MiFID has prioritized automation in the front office over the middle and back office and a disconnect now exists in the importance that has been placed on the automation of the settlement function, despite MiFID obligations extending to this area.
What the panel discussions did highlight is that the harmonisation of settlement cycles is not exclusively a back and middle-office issue. High-speed trading is now capable of sub-millisecond execution and yet settlement takes two or even three days to complete – and three days of credit risk exposure is not favoured in anyones book. The CSD consultation paper in absolute terms demonstrates the requirements for buy and sell-side to have a more holistic view of trade-flow processes which includes all parts of the trading lifecycle.
A recording of the industry webinar discussion is available at www.omgeo.com.