With just about two years left before the UK (as well as the EU and Switzerland) moves to T+1, Jamie Bell, head of Capital Markets at the UK’s Financial Conduct Authority (FCA) checked in with the industry on the FCA’s blog. In his article titled “T+1 settlement: time is ticking – why firms should act now“, he shares five recommendations for a smooth transition and highlights the challenges that may be holding back market participants.
“T+1 will reduce the time you have to process your transactions by around 80 per cent. Planning early will be crucial,” Bell reminds readers. He lists five recommendations for a smooth transition: strengthening inventory management, reviewing end-to-end settlement arrangements, automation, recognising challenges unique to the region, and early engagement with clients and counterparties.
A different beast
Some market participants would have already experienced success with the US move to T+1 last year. However, success with the US move does not equate success with the UK move. Bell points out that the US has a centralised post-trade infrastructure that is very different to the UK’s.
He shares an example: “In the US, T+1 was focused on a key deadline for completing affirmations, and responsibility for meeting this deadline was placed on broker-dealers. In contrast, the UK does not have an affirmation process and responsibility for pre-settlement actions is much more dispersed across the settlement chain.”
Moving outside of the UK to the EU, the complexity can only increase due to cross-border settlement, as well as multiple CSDs, CCPs, and currencies.
Stronger together
“Your settlement performance will only be as good as the weakest link in your chain of clients and counterparties,” Bell warns. Although many firms may be confident in their own preparations for T+1, they might not be as confident about the level of awareness among their clients and counterparties, especially those located overseas. Communication is key in these situations, and firms will have to ensure that their clients and counterparties – especially smaller sized ones – have suitable arrangements in place, writes Bell.
Another major challenge will be inventory management. “Accurate data for place of settlement (PSET) and place of safekeeping (PSAF) will be key tools. Crucially, you should know where your securities are located when you execute a trade,” Bell advises.
To conclude, he leaves readers with a reminder that the UK’s T+1 Accelerated Settlement Taskforce (AST) provides resources to guide market participants through the transition. Market participants should communicate their issues to the organisation during engagement initiatives.
