COLUMN – OLAF RANSOME | Your custodian can absorb the shock of T+1 – but at a cost you may not have priced in.
There are three ways you might be thinking about T+1, which is scheduled to become a reality in October 2027.
Possibility A: You are all over it.
Possibility B: October next year is so far away, you’ll worry about this one later.
Possibility C: You’re just not interested – you’ll just keep doing what you have always done.
If your answer is A, these actionable insights might help you confirm your plan, or to fine tune it. For those whose answer is B or C, this article might save you pain later.
In my almost 40 years in financial services, I have seen one recurring theme about regulatory or mandatory change. First, there is denial about the change: either “it ain’t going to happen” or “it won’t be on time”, which is then followed, sometime later, by “Oh, this is going to happen – let the change team draw up a list of requirements.” What follows is a realisation that the organisation cannot deliver all this change in the time available. So, a revised order goes to the change team: “Spec out a version 1.0 which is just enough to get us a tick in the box – the “must do” stuff. We’ll fix all the “should do” stuff in version 2.0.”
A promise to fix the “should do” stuff is one of the biggest lies of all time.
As the Bankers’ Plumber, my nugget of wisdom on change is: “prepare when you can and not when you have to.” The emphasis here is on the “prepare”: you do not need to be the first mover, but you should be ready. Your failure to plan does not make your immediate problem everybody else’s emergency.
The new with the old
This article is part two of a six part series for PostTrade 360 in which I shed light on new things and how we might make them fit into our old but functional legacy systems and processes. The first looked at AI.
I started by asking some questions. Liquidity and cash management are always a hot topic for me. My first two stops were to talk to a leader at an industry association and to look at what CLS, the leading financial market infrastructure in the space, was doing. The FX markets are where we all do a significant bit of our cash management; selling or swapping what we have for what we need, making CLS’s whitepaper: T+1, the FX ecosystem and CLS: What a difference a day makes, worth a read.
My take on this 15 minute read, is:
- CLS settlement will stay the same. This means that to keep doing FX settlement without settlement risk, all trades must be submitted by 00:00 on value date, with third party or non-settlement members most likely having to submit earlier.
- A staggering 40% of CLS settlement members put their hands up to say that if there were going to be changes to timings, they would have development work to do. Shockingly, timings are somehow kind of hard coded into the process.
- The picture amongst buy-side firms is varied; 11% will estimate FX when they do the underlying trades, 17% will execute FX once confirmations are matched up and 20% see no change to existing processes.
From my industry association contact, the feedback was that the numbers associated with securities related funding are relatively insignificant, so any disruption from changes to value dates was not yet going to force changes in the FX markets.
This suggests that the market does not want to trade later because right now any same day FX cannot settle through CLS, so doing it would necessitate taking settlement risk, which is not good. This begs the question of whether if same day PvP settlement was possible markets would change the way they operate. My own take on this is that rationally they should: today, funding of CLS specifically and all other FX settlement as one-way payments generally, has a huge reliance on correspondent banks and intra-day overdrafts. The latter have a less well understood side-effect, which is that they drive liquidity buffers for both credit takers and givers.
Which gets me to the matter of “what happens if in my shop we don’t do anything?” This translates to a “let the custodian take the strain” approach. Send the trades to the custodian to be settled and then deal with the funding later. My view is that this quite likely leads to overnight long or short cash balances versus the practice today where shorts are covered and long funds are used either in reverse repo or sweeps to money market funds, following that old maxim that unsecured cash balances are not good and securities balances are better. Long cash at a custodian is generally badly remunerated, so there will be opportunity cost and a drag on performance. Short cash is expensive and has a double whammy of costs. First is the actual cost, which is normally punitive, and second is the long-term cost of higher liquidity buffers.
The impact of “do nothing” will be largely subtle: some small costs, maybe a failed trade or two more. Most likely nobody is going to get shot for doing nothing. The flip side of that is that there is always going to be flack for the person who wants to do something.
To consider this you might ask yourself a series of key questions depending on your status:
- Possibility A – I am all over it: What impact on cash management does our plan tell us to expect? Do we have a quantum? See below for how you might estimate it.
- Possibility B – October next year is so far away, you’ll worry about this one later: Take the pain to do a very first pass, high level review. Find out when today your cut-off times are; when does your securities processing system(s) send booking information downstream to your cash management system for value date tomorrow? Identify what the timing gap is going to be when you trade today and settle tomorrow, and which processes would need to be completed sooner or done differently. Can you envisage a workaround where you could extract provisional numbers for securities settlement needs for value date tomorrow in time for the regular cycle of cash management work that you do today for value tomorrow? If you do come up with a sensible answer to the last one, then a plausible approach is to say: “we can leave the detail planning to later.” If you can’t find that sensible answer, then you know that more work now is the more prudent course of action.
- Possibility C: I am just not interested – I’ll just keep doing what I have always done. Do a quick back of an envelope check. What is the normal value of a day’s securities settlement with your custodian? Now, let’s stress test what happens if things go wrong. The law of big numbers tells us you are as likely to end up long as you are to end up short. If 50% of the time you were to end up cash long at your custodian and only receive the overnight rate less 50 bps, how much does that make over 180 days using a cash amount of 50% of your normal day? Very broadly every 1mm will cost you 1’250 per year in the same currency. Now, if the other 50% of the time you are cash short, then you could expect that to cost you 200 bps over base date. How much does that make on 50% of your normal settlement amount. Very broadly every 1mm will cost you 5’000 per year in the same currency. Add the two together and you have a very rough indicator of the potential initial cost of doing nothing. I say “initial” because at some point, you will need to make some degree of process change, simply because you operate within a market that will have moved on.
I hope you find this month’s article useful; perhaps it helps you think about the challenges on your plate, or perhaps it just confirms that you are ‘not alone” and it is not a case of “everybody else gets it, and whether you’re an A, B, or C, the cost of waiting is now quantifiable.”
In any case, please let me know what you think!
On a personal note
2026 marks five years of partnership with the wonderful team at POSTTRADE 360° – and it keeps getting better.
I hope you’ll join me and the PostTrade360 team in Stockholm in September for their annual post-trade event, where I’ll be hosting a series of discussion forums with a range of guests. More on the event – click here.
Referring to himself as The Bankers’ Plumber, Olaf Ransome is founder of 3C Advisory LLC – drawing on decades of senior operational experience from large banks. To connect, find his LinkedIn page here.
#everydaybanking #operations #banking #t+1
