Last year saw a major milestone achieved in the harmonisation of European settlement structures as many eurozone markets successfully migrated to the shorter T+2 two day settlement cycle.
As a result, 80 per cent of respondents to a recent Omgeo survey believe T+2 will become the global standard for settlement cycles within 10 years, with 52 per cent expecting the US to move from its current T+3 cycle to a T+2 model within the next three years.
Harmonising settlement cycles globally will help to facilitate better cross-border trading, reduce counterparty and operational risk across financial markets, as well as reduce margin and liquidity requirements during market volatility. We’ve seen widespread support across the industry for a globally harmonised settlement cycle in line with T+2. The Omgeo research also recognised that Europe’s move to T+2 has so far been smooth, with 74% of market participants echoing this sentiment.
As Europe and the US move towards shorter settlement cycles, there will inevitably be new pressure put upon middle and back-office operations that facilitate trade confirmation. A ripple effect will be felt in reconciliation and exception processing. It will therefore take accurate implementation of technology to ensure the benefits touted are achieved and it’s here that efficient trade-processing and reconciliation is critical in order to operate, keep up to speed and grow.
The demand for better efficiency
There are approximately 250 trading days in a year. In a T+3 environment that means around 83 settlement cycles in a year to successfully complete all trade confirmations, settlements and reconciliation processes. With T+2, settlement cycles accelerate to 125 cycles per year, drastically increasing the velocity of trade movement and investment cycles by 50%.
Two factors are therefore pushing the need for increased efficiency: growth in volume and shrinking time frames. Combined with a marked increase in the volume of trade movement, asset management firms must streamline their trade-processing offering and ensure that as their revenues and Assets Under Management (AUM) grow, their post-trade workflow is also enhanced in sync. This is essential for preventing a situation in which a front office is moving at 100 miles per hour while a middle or back office is crawling behind.
Automation integration and real time: the operational effect
As trading windows become shorter and volumes increase, automation, integration and real-time reconciliation is a must. Firms must achieve a 50% increase in workflow efficiency across operations and it is here that greater automation of post-trade processing plays an important role. Flexibility is also crucial as shorter settlement cycles increase the need for different types of instruments, increasing complexity and data requirements.
Firms must have the infrastructure in place to efficiently meet the demand of higher volumes and operate in real time or near real time. This requires moving from batch to intra-day processing, supporting the real-time environment necessary to reduce the risk at each point and increase workflow efficiency. This move by default requires better integration and it’s essential that firms have the technological means to make this happen, also identifying areas where straight-through processing (STP) can be achieved across post-trade confirmation, settlement and reconciliation.
Evolving regulation and operational control
Regulatory pressures and demands for evidence of operational control are becoming increasingly rigorous and require an increasing amount of resource. An overarching focus on increasing transparency runs through much of the legislation and shorter trade settlement windows through T+2 support this.
For example, STP resulting from T+2 inherently satisfies regulatory pressure to know at any given time the firm’s risk profile and intra-day liquidity. STP also increases operational efficiency allowing for the reallocation of resources to higher value tasks, particularly through exception management. This is a key part of reconciliation best practice that becomes even more critical in the process of managing huge volumes while meeting compressed deadlines associated with T+2. Firms which have successfully adapted this piece into their DNA will be those to succeed and best meet T+2 deadlines.
When it comes to other post-trade processing structures, such as algorithmically driven trading two elements are crucial to facilitate this process into the post trade workflow. Firstly, if an algorithmic system is used it’s essential to ensure that the post trade infrastructure is highly scalable to meet new pressures in trade velocity, volume and market events. In high frequency trading environments which involve algorithmic trading, efficient rules based processing is critical in order to meet the increased velocity of trade movement.
As trading windows become more compressed institutional investors have even more to do between trading and settlement. Having the right technological infrastructure in position is crucial to accommodate this environment. Those that do not have the right automation ready will face considerable challenges when working to meet these new demands. Firms must address their long-term goals, invest in their technology infrastructure and evaluate options to re-engineer their processes to offer the right reconciliation and real-time processes required.
Kashyap Kapasi is director, Strategic Solutions, Investment Services and Eric Werab is director of Financial Control Solutions at Fiserv