A recent study by Omgeo shows half of market participants are not preparing for T+2, despite being in favor of shorter settlement cycles.
The post-trade central matching provider received 590 responses from custodian banks, broker/dealers, fund managers and other financial institutions in Asia-Pacific, North America and Europe for a survey focusing on the industrys readiness for shortened settlement cycles. The data was collected by Global Custodian as part of its annual survey of agent banks in major and emerging markets. Survey respondents were strongly in favor of a move to T+2, 66% believe that financial penalties should be incurred for late settlement.
Tony Freeman, executive director of industry relations at Omgeo, said: There is a global shift towards shorter settlement cycles to reduce exposure to counterparties and market prices and to achieve liquidity, capital and collateral savings. The lack of meaningful preparation is concerning as we gain increasing momentum towards shorter settlement cycles globally.
Awareness of the case for shortening the settlement timetable is the highest in Europe (59%), which is poised to move to T+2 by mid-2014 ahead of the implementation of Target2Securities (T2S), and in Asia-Pacific (22%), where a number of markets already settle on T+2. In North America (6%), awareness of shortened settlement cycles is the lowest, with the topic only starting to re-emerge following a recent study by the Boston Consulting Group that estimates that it would take three years to move the US securities industry to T+2.
In terms of achieving T+2 settlement, the survey found that 60% of respondents considered the timely receipt of trade details from counterparties the most crucial determinant of success.
Commenting on this, Tony Freeman added: Market participants clearly appreciate that their own readiness to settle trades on T+2 is only as good as that of their counterparties hence the insistence on timely delivery of trade details. However, only 20% of respondents to the survey are educating their clients about the impact of T+2.
The study also showed that:- The majority of respondents (72%) regard shorter settlement timetables as beneficial to the securities industry as a whole.- There is a consensus that settlement on T+2 is an attainable goal in every major market and many emerging markets and there is a growing appreciation of the contribution that Same Day Affirmation can make to achieving it.- The majority of market participants (62%) believe that they are ready for settlement on T+2.- A significant number of respondents (nearly 40%) admit that they are not ready for T+2. Of those that are making preparation, more than half think that it will take them over a year to complete, and one in seven believes that it will take more than two years.- Broker-dealers are more pro-active in preparing for T+2 than custodian banks and fund managers, although a certain number of market participants in all three segments are investing in technology, processes and people to cope with the change.- Interest in shortened settlement cycles is mounting. However, nearly 50% cite that financial penalties for the late settlement would prompt increased investment in post-trade processes.- A clear majority of respondents consider the timely receipt of trade details a key determinant of success in adapting to T+2 settlement.- Momentum around T+2 will accelerate within the next 18 months, with Europe continuing to forge ahead in harmonizing settlement practices across the region.
(JDC)