GC Friday Interview: Eaton Vance's O'Brien On Migrating To T+2

Global Custodian speaks to Mike O'Brien, global head of trading at Eaton Vance, who explains how his firm has dealt with the transition to the new European T+2 settlement cycle and what his outlook is for the future.
By Joe Parsons(2147488729)
This week 23 European markets transitioned to the new securities settlement cycle of T+2, putting Europe ahead of the U.S. settlement cycle, which is still T+3. By shortening the cycle, European regulators hope to standardize settlement procedures across all of the affected markets and to shorten the time needed to observe and address settlement failures. Global Custodian speaks to Mike O’Brien, director of global trading at Eaton Vance, who explains how his firm has dealt with the transition and what his outlook is for the future of settlement.

GC: How has the move to the new settlement cycle gone?

MO: It has been a pretty smooth transition for us, we haven’t had any issues yet. We are involved with a lot of local markets around the world, many of which are already T+2, so this is a welcome adoption of that standard into the European market.

GC: Where do you see the risks with the new settlement cycle?

MO: For European market infrastructure, I think the technology has reached a point where the T+2 settlement cycle is very realistic. Several years ago, manual intervention was common in the settlement process; certainly I recall there was a lot more manual processing back then than there is now, so I think for us this is a welcome change.

GC: Do you think there might be a struggle for global firms moving to Europe’s T+2?

MO: If you are running a global asset management firm, it is a much better standpoint. You need 24 hour coverage from the trading and operation side. We operate around the clock, we settle T+0 in many markets including some in Latin America and Asia. So certainly if you don’t have 24 hour coverage, it could be a challenge, but I think for most truly global asset managers, they are moving in that direction or are already there. It could be a challenge for smaller firms but for bigger firms not so much.

GC: How effective will T+2 be in reducing counterparty risk?

MO: I think shaving off one day from the T+3 settlement cycle is very important in reducing counterparty risk. Regardless of what happens to your trades, so if your counterparty was to default in that time period, cutting a day out of that makes a big difference. If you were in that situation where a counterparty defaults, regardless of what protections you may or may not have in that process, cutting a day off is huge.

From an asset manager perspective, if you are selling your redemption to fund another trade, and with many other markets around the world already T+2, running a global strategy becomes difficult if want to rotate a position out of one country into another when there are different settlement cycles. From our perspective, you are trying to balance a short settlement cycle, reduce the counterparty risk and get access to the cash quicker.

We do settle at T+0 in many other countries, but I think that’s not a model that is scalable for the industry. So T+2 is a big improvement.

GC: What do you expect from your custodians, at a functional and risk level, with the move to T+2?

MO: On the operational side we want tighter deadlines, tighter being our instruction deadline to be as close to the settlement day as possible. The more improvements they have to give us more flexibility instructing later rather than earlier is something we are focused on. It is great to have T+2 settlement cycles, but it is the instruction deadline (i.e. less time for us to instruct a trade) that’s a problem. From the custody side that is our number one request. In addition, if there is any market innovation to reduce risk, we want them to be on top of that and to give us information on.