The Challenge of Applying T+2 Globally

Investing across time zones and in different currency areas are set to be among the biggest headaches facing institutional investors as Europe moves to a T+2 settlement cycle, according to David Pearson, strategic business architect at Fidessa.
By Editorial
Investing across time zones and in different currency areas are set to be among the biggest headaches facing institutional investors as Europe moves to a T+2 settlement cycle, according to David Pearson, strategic business architect at Fidessa.

While the shift to T+2 in the European Union – which has a January 2015 deadline, though many countries will be moving to the new regime next month – is unlikely to cause problems for trading within Europe, it is those firms investing globally that will find it most challenging.

“Investing in distant time zones is likely to be a big issue post T+2,” says Pearson, “Let’s say you’ve agreed an Asian trade at 4pm Paris time, well that’s 11pm in Singapore which means you might not get all the necessary settlement instructions until the following morning.”

One of the most crucial stumbling blocks of trading in this way is custodians will need to receive their instructions on T+1 in order to settle the trade the following day. Any corrections or clarifications needed from the initial settlement instructions mean only a small window of opportunity is open to resolve problems before the custodian’s deadline, explained Pearson, who is also co-chair of the Fix Trading Community EMEA Post-trade Working Group.

“The key message for investors is, you must be able to instruct on T+1 and if there are any problems along the way, you only have a finite time period to deal with any issues, so having a proper process in place will be vital,” he adds.

The other consideration for European buy-siders is trading in different currencies, especially those outside of the major global trading currencies.

Pearson explains: “You will need to be sure you have the right currency in the right place at the right time. Of course, this is the same whether on T+3 or T+2 but having one less day to do it adds a significant extra challenge to the post-trade process.”

While most firms will readily have US dollars or sterling on-hand, when trading in smaller emerging markets and those with currency restrictions, it may be more difficult to acquire local currency needed to complete a trade.

“These problems add up to make post-trade significantly more complicated and time-pressured than it is today,” Pearson says. “However, failing to comply with the new settlement rules will start to bite financially with fines being levied for late delivery so it’s important to be ready before the move to T+2.”

So what is the solution? Pearson says that improving the communication of settlement information across time zones could be significantly improved by adopting standardized electronic messaging.

“There is currently a FIX initiative to make settlement instructions part of standard messaging between asset managers and brokers. Right now, too many processes are very manual which means they aren’t as timely as they will need to be to deal with a shorter settlement cycle.”

Dealing with foreign currencies however, is potentially even more complex and Pearson said banks will need to develop new solutions to enable counterparties to better manage their currency needs more rapidly.

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