T+1 War Rooms – Europe: Preparation and execution prevail; but what happens when the hyper focus ends and market stress occurs?

Participants in Europe are so satisfied with the transition of T+1 that the only issues are hypothetical ones possibly occuring at the end of this period of heightened focus, command centres and 24/7 support from their custodians.

By Jonathan Watkins

Market participants in Europe are drawing comparisons between the move to T+1 and the Y2K scare in 1999, after the transition to a shortened settlement cycle occurred without any drama or incident, for the most part. 

Despite worries ranging from spiking fail rates and low affirmation percentages to funding gaps and system glitches on day one, European participants agree that the over-preparation, hyper focus and sheer effort from the industry through education and support led to a historic transition. 

“It was very smooth and someone in our office likened it to Y2K, which I took umbrage with because I think the reason it was smooth was because the industry got its act together and made sure that everybody knew what they had to do and when they had to do it. And I think that really folded into a very smooth transition,” said one operations executive from an asset manager, speaking on the T+1 War Rooms initiative launched by Global Custodian and The ValueExchange, in partnership with Citi.

“We don’t often get the chance to pat ourselves on the back, so you might as well take this opportunity.” 

Following on, another buy-side voice added: “I think as much as we can make a joke that it was kind of a non-event, that shouldn’t away from the planning, preparation, full scale project teams that went on for a year or so beforehand.  

“Our approach was very data driven in the lead up, identifying those kind of broker confirmations that may have been of concern. To work with those brokers to make sure they were coming in on time, we saw very similar to others in terms of actually improving settlement rates.” 

The positivity reflected the sentiment of the industry across the world following the switch to T+1, and almost as if it were too good to be true, the group of speakers on the roundtable were almost searching for some minor issues to report. 

Participants referenced the overnight issue at DTCC as a minor hiccup, however no transactions appeared to be impacted, while there were some grumbles about brokers who hadn’t got their house in order. 

“We did see a number of brokers that had incorrectly formatted confirms,” said one speaker, while another noted: “There was only one errant broker who was consistently not affirming their trades. Right up until Friday that was the case. But on Monday they came through. But I do think it was largely to do with the fact we threatened to stop trading with them if they didn’t comply, which they promptly did.” 

Those issues seem confined to smaller brokers, with one large participant from that community noting: “We seem in good health. Look, there’s a couple of counterparties that aren’t on CTM that aren’t building or billing the confirmations in time for affirmation. So that’s been a case of targeting those smaller counterparties to say ‘look, when are you going to be ready?’” 

Calm before the storm? 

With so much praise for the focus and preparation of the industry, attention will now turn to the future where a combination of public holidays, volumes and volatility spikes and the foot coming somewhat of the pedal in terms of sheer focus on the new operational changes. 

“The hyper-care focus helped in those initial days, because we wanted to monitor changes related to volumes received at different times,” said Michele Pitts, global head of custody data, securities services, Citi. “With the return to our new BAU processing, even without the hyper-care focus, we will not see a fall off of coverage and support as we now understand that the systems can accommodate and function through the new affirmation times and with increased volumes.  Additionally, market participants are similarly responding to the new changes.” 

It is true that the market has already survived two major tests over the first week in the double settlement day and MSCI rebalancing. Pitts noted: “Although our volumes on double settlement day saw a 75% uptick, our settlement efficiency rates remained unchanged.” 

One buy-side voice added: “We’re just looking at the next US holiday and what that might bring – what does that feel like in the T+1 world, especially with funding and FX? It’s definitely a topic that we’re thinking about ahead of time and I think there will be some pre-checks on the accounts that are not USD-based currencies.” 

A handful of custodians have emerged from the preparation process for T+1 with huge plaudits. One asset manager, who hinted at some frustration towards the CLS decision not to move its cut-offs, instead praised the work of custodians noting: “What this shows is that there’s been a lot of great work by everyone to be prepared in persuading custodians to move closer to that CLS deadline to allow trades to still be settling via PvP.” 

Night and day differences 

Another interesting topic which came up was around trades settling in the day batch rather than the overnight batch, which tells a story of gross settlement and potentially additional costs from a margin perspective. One speaker noted that around a quarter of trades were settling in that day batch, mostly via clients in Europe and Asia. 

“We knew there were going to be challenges with clients outside of the US time zone, so we continue to work closely with them,” said Pitts. “The challenge is where our clients are intermediaries, they have end clients and everything is part of that ripple effect of getting instructions in to be processed.” 

Many custodians had 24/7 open channels for clients during the transition – as part of the ‘command centre/war room’ approach – something that won’t last forever, so could we see some issues around affirmation rates and fails in the near future? Possibly. But, elements of support seem set to continue over the space of a month, and by that time the market should be in its groove.

One asset manager said, when asked about concerns or worries: “It’s more the longer-term items of stress testing, extending settlement stress testing, your custodian’s ability to afford you an overdraft, seeing what the claims do in this quarter compared to last quarter. It’s not the day-to-day so much now, but more those rainy day scenarios and seeing how the market reacts to that along with your custodian and your counterparts.” 

The conversation between the group of participants ranging from asset servicers to brokers to asset managers could be summed up in one closing comment that “you should probably rename this from war room to peace room”.