When the European Commission published its proposal for a regulation for CSDs and for improving settlement efficiency in March 2012, it gave a deadline of Jan. 1, 2015 for all EU member states to harmonize their securities settlement cycle to T+2. This change in settlement practices would pave the way for the European Central Bank’s TARGET2-Securities (T2S) initiative, the goal of which is to help remove the barriers to progress towards a single European market, and reduce the cost and risk associated with trade settlement by creating a single, pan-European platform for trade settlement.
The industry and policy makers, in the most part, arrived at a consensus early on that T2S and the move to harmonized settlement cycles were laudable exercises. In recent years, the risk has been that they would be overshadowed by the more contentious regulatory proposals for the OTC derivatives market and that the resources needed to push through T+2 would simply become too stretched to enable it to happen.
It is therefore significant and positive news that the industry is taking proactive steps to towards the implementation of T+2. Ten markets have now agreed to move to this new settlement time-frame by Oct. 6, 2014. These markets include U.K. and Ireland, Belgium, France, Netherlands, Hungary and the four Nordic markets—and it is likely that more will follow shortly.
This development in the T+2 story is important for two reasons. Firstly, it shows that the industry can be proactive in implementing efficiency measures ahead of regulatory mandates. Given the rising concerns that some of the current regulatory reforms could now be postponed (or even rewritten) until after the European elections in May next year, the fact that T+2 implementation remains on course is even more significant. Ultimately, it means that the time spent arriving at agreements on a political level, and developing implementation as an industry, has been not been wasted.
Secondly, the October 6 date gives market participants sufficient time for participants and infrastructures to prepare and test their systems, and for the sell-side to consult with their buy-side clients about T+2, before the Commission’s deadline—at which point, those who fail to settle on T+2 will be subject to financial penalties and a naming and shaming regime.
Firms that have automated their post-trade processes should be relatively well placed to adjust to T+2. Their infrastructure is likely to support speedier settlement, however, processes will have to be adjusted. And given that most markets will need to shave a whole 24 hours off their middle-offices, even automated firms should not be too complacent. That said, firms that need to pay most attention are the un-automated firms—those that continue to use manual processes, including fax or spread sheets, during the trade verification process. These practices are risky, error prone and slow, and unlikely to be able to sustain trade processing in a shorter settlement environment.