VIDEO | The transition to T+1 in the UK, EU, and Switzerland was a top-of-mind topic at the PostTrade 360° Nordic 2024 conference, as evidenced by the number of sessions dedicated to it. The topic once again took centre stage in the panel titled “How America’s T+1 has turned out for Europe’s firms – and what’s still to fix” – this time, interpreted through a Europe-centric lens focused on applicable lessons learnt from the US transition.

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The session began with a poll asking the audience a question: “For your firm, how did the migration to T+1 in the Americas go?”

“Slightly better than expected” got the most votes, 12, followed by “significantly better than expected” with 11 votes. None said that it was worse than expected.

In response to the results, Alan Cameron, the head of advisory FIC client line at BNP Paribas said, “A lot of the big issues that people talked about didn’t really materialise, and that’s not because they weren’t going to be big issues. It’s because people talked about them early and put plans in place around them.”

A good job done

William Hodash, working group coordinator at the International Securities Services Association (ISSA), agreed. Based on numbers published by the Depository Trust and Clearing Corporation (DTCC) after the transition, the National Securities Clearing Corporation (NSCC) saw margin savings of 29 per cent, or USD3.7 billion. “Some of us were concerned that fail rates might spike around implementation, but they barely budged.” The institutional trade fail rate was 3.35 per cent six days prior to implementation, and 3.30 per cent eight days after.

Emma Johnson, executive director at JP Morgan, believes that timing was key to US’ success in the transition. “The industry mobilised early,” she said. Detailed preparations with industry working groups had commenced in 2021 so “T+1 in the US was not a surprise”, and “the industry galvanised behind it”.

She identified a few other factors for success: industry leadership; education and engagement; jurisdictional readiness; market practice. For the last, she said, “The industry collaborated to define a market practice that could achieve the truncated operational day, meet the affirmation targets of 90 per cent set by the DTCC… A diverse group of industry participants – the financial market infrastructures (FMIs), investors, investment managers, brokers, and custodians – listened to each other, trust what each group was saying, and then drove a  consensus-based implementation.”

A shortfall

Where she thinks the transition hasn’t been handled so well was the scope for what she calls the “international flows”. This includes foreign security settling in the Depository Trust Company (DTC), US security settling in the international central securities depositories (ICSDs), and cross-border settlement.

“Front and centre to these three core themes was a 1995 SEC (US’ Securities and Exchange Commission) ruling which exempts certain securities from the settlement convention,” Johnson explained. Although the policy was adopted into the T+1 final rule, there was no concrete understanding of whether “it was operable and relevant in a T+1 environment”.

“You can’t implement what you don’t know,” she pointed out. “This challenged firms’ ability to work with clients and educate them on what they need to do, when, and how.”

Finding their own way

Fortunately, organisations such as the Securities Industry and Financial Markets Association (SIFMA) and Association for Financial Markets in Europe (AFME) stepped in to create an agreement on “some principles firms should base their scope on to avoid misalignment and settlement risk”.

“The industry’s made its own adjustment, and I think that’s what we do. We have this already – we have guilds in the UK that are at T+1 domestically… We are well-versed in this, so I think this is reassuring.”

FX not an issue

Hodash agreed that the industry has a way for working things out on its own. He recalled that the FX analysis “didn’t get done that thoroughly” before T+1 was implemented. “The FX industry seemed to be concerned about it, but wasn’t raising objections and certainly wasn’t being loud about it. I think the reason was, as Emma said, they knew they had the sophistication to make adjustments to make this work.” Specifically, the CLS payment-versus-payment processing service is “very effective for the FX industry”.

“Funding costs have gone up, including FX execution costs and quality of execution,” he admitted. “But there has been no great deterioration, no significant issues. The market worked around it at a cost. There’s a cost of best execution, and the most sophisticated players were able to deal with this.”

Clearstream Banking’s CEO Dirk Loscher has experienced a similar sense of confidence from his clients. Germany sees a high volume of US securities traded on its exchanges. Unsurprisingly, most of Clearstream Banking’s clients have worries that revolved around three main issues: FX capabilities, cut-off timees, and the affirmation-confirmation process. Loscher concded that cross-border trades simply “do not work the same way today anymore”.

Yet, when the firm reached out to market participants in Germany to find out whether they would prefer to move to T+1 for US instruments in Germany in order to be aligned with the home market, the feedback was very clear. “Noo was the answer,” Loscher shared. “That would add a lot of complexity from their perspective, so they would rather have us aligned with the developments in Europe and move the US activity traded in Germany at the same time we move everything else.”

Panellists:
Emma Johnson, Executive Director, JP Morgan
Alan Cameron, Head of Advisory FIC Client Line, BNP Paribas
Dirk Loscher, CEO, Clearstream Banking AG.
William Hodash, Working Group Coordinator, International Securities Services Association

Moderator:
Pete Tomlinson, Director – Post Trade and Prime Services, AFME

• The consolidated PostTrade 360° Nordic conference, in Stockholm on 4–5 September 2024, came to host 1,200+ delegates and featured 70 sessions.
• Our coverage relating to the event is indexed here.
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