The Asia Securities Industry and Financial Markets Association (ASIFMA) has published a white paper titled, “Eyes wide open: a balanced view of APAC market readiness for the T+1 equity settlement cycle”. Written in collaboration with EY (Ernst & Young), the study takes a close look at seven APAC markets and their readiness for a shortened settlement cycle.
The markets included are Hong Kong, Japan, Korea, Malaysia, Singapore, Taiwan, and Thailand. Feedback was collected from a total of 53 firms representing asset managers, securities brokerages, investment institutions, and custody banks.
The paper warns against a “simplistic like-for-like comparison between the experience undergone by global developed markets and the one APAC markets will likely face”. The APAC markets are fragmented, with structural, regulatory, and operational differences between different jurisdictions. The migration, therefore, should not be viewed as a single initiative, but as “a series of market-specific transformations, each necessitating tailored analysis, focused stakeholder engagement, and distinct implementation strategies”. Rather than a “big bang” approach, a market-by-market transition might be preferred.
Areas in focus
The study identifies five key operational themes that should be managed before moving to a shorter settlement cycle:
• Delayed settlement – APAC markets enforce stricter panelties for settlement fails. In no-fail markets, brokers have to bear the full brunt of funding and penalties. This would affect the cost-effectiveness of a shorter settlement cycle.
• FX liquidity and funding – some APAC markets have regulations that prohibit foreign investors from getting unresricted access to local currencies. This could impede timely settlement in a T+1 window unless the trades are pre-funded – a practice considered undesirable to most global investors.
• Securities lending and borrowing (SBL) – the US and other developed markets have robust SBL mechanisms to support settlement fails. In Asia, the focus is on no-fail settlement, with processing of SBL mostly remaining manual.
• Processing infrastructures and time zones – APAC markets are fragmented with no standardised trade processing systems or infrastructure, leading to a higher degree of manual post trade execution handling. The high proportion of trades from investors in time zones that have little operational overlap with the region exacerbates this issue.
• Margin collateral – the paper states that clarification is needed regarding margin calls and collateral requirements. Each market should also consider expanding the types of eligible collateral.
Next steps
The paper suggests a framework for APAC market participants to prepare for T+1 transition that includes conducting comprehensive market assessments, collaborative planning, phased implementation, technology enablement, doing cost-benefit analyses, and monitoring progress.
To conclude, the report cautions that the push for T+1 is “fueled by the identified, though not yet universally realised, benefits of reduced counterparty risk and improved capital efficiency. Whether these benefits can materialise for a certain market (and if yes, to what extent) highly depends on the specific market structures”.
Based on industry feedback, a “rushed, inadequately prepared” migration is not desired and comes with inherent risks. The transition can only be successful if it is supported by investments in technology, process re-engineering, and cross-border coordination.
