Trade settlement cycles around the world have shortened in recent years. The United States, the world’s biggest and most liquid market, has moved to a T+1 settlement cycle, whilst others are starting to move to T+0, with India already offering optional same-day settlement. The shift has major ramifications for other markets and financial institutions, including those here in Australia and Asia Pacific.
While most developed markets around the world have operated on a T+2 settlement cycle for years, the changes required for T+1 are of a different order of magnitude, which comes with benefits and challenges.
Benefits of a shorter settlement cycle
The move to T+1 settlement in the US (along with similar moves in Argentina, Canada and Mexico) has helped accelerate the buying and selling process, reduce the time it takes for trades to be affirmed and subsequently settled.
The move to a T+1 settlement is also expected to help improve efficiencies across the value chain. For example, it should bring improvements in how capital is deployed, as investors in these markets receive their securities or money sooner, meaning it can be redeployed quicker. While some participants believe this may increase margin volatility, the US Depository Trust & Clearing Corporation (DTCC) estimates that removing one day’s exposure to risk could translate into a 41% reduction[1] in the volatility component of central counter parties (CCP) margin requirements.
Impact of US T+1 in APAC
APAC markets have traditionally benefited from being several hours in front of the US. With the US now at T+1, this is likely to encourage market participants to move back in line with North America.
One of the major factors APAC investors now need to watch is time of affirmation. The affirmation is a requirement of the US market – and is an acknowledgement by an affirming party that the trade details of an institutional investor agree with those of its brokers. In the Australian and New Zealand markets, participants must now affirm trades by 9:00 pm Eastern Standard Time (US) on trade date.
There is also the impact the volume of trading will have on the US markets, as those in Asia rush to fill orders. If these market participants miss the affirmation cut off they will incur late charges, as well as higher Depositary Trust and Clearing Corporation (DTCC) charges. Looking at what the market has seen post implementation there has been no observations indicating a change in trading volumes.
Considerations of APAC markets moving towards T+1
Differing settlement cycles are not a new reality for the Asia-Pacific region. China and the Hong Kong Stock connect schemes, as examples, already operate on a T+0 basis. whilst most other major markets in the region operate on a T+2 basis.
Numerous factors make a move to T+1 in APAC more complex compared to other markets. The fragmentation across the region, differing regulatory regimes and time zones, a multitude of currencies – including some restricted currencies – are key considerations.
As an example, the Australian and New Zealand markets are nearly a day ahead of large parts of the globe, making T+2 effectively T+1.5 for offshore investment into these markets.
Trade matching, processing, and settlement in a T+1 environment in APAC should still align with standard global processes and are not seen as an insurmountable challenge. The adoption of follow-the-sun models will prove beneficial for large institutions, as has been seen in the America’s move to T+1.
Any change over the short term may require institutional investors to access technology, or work with their providers, to enable them to manage settlements and straight-through processes whilst also considering funding models. Over the longer term, firms with manual processes are likely to implement new systems and technology to further streamline processes to replace current T+2 protocols.
Will Australia follow?
With the US move to T+1 settlement now complete, there will be heightened conversations as to when the likes of Australia and other markets will follow[2].
To help plan its move to a T+1 settlement period, the Australian Securities Exchange (ASX) has collated a summary of feedback from industry stakeholders which have provided input to the ASX T+1 Advisor and ASX Business Committee Groups[3]. The aim is to release a summary of feedback, from this white paper response, in August 2024 that will include next steps, with a view to targeting a decision on any possible T+1 transition in Australia in November 2024.
Meanwhile, the work to consider a possible transition to T+1 in Australia is anticipated to go through several phases including:
- Identifying considerations for T+1
- Observing the US, Canada, Argentina, and Mexico and their recent transitions
- Establishing a clear consensus on a move to T+1 in Australia
- Strategic considerations; decision-making and implementation including timetable, costs, and consultation with the Clearing House Electronic Subregister System (CHESS) replacement initiative also in mind
- Looking at resourcing requirements to support any move
- Allowing sufficient time for industry and investor education to understand any changes and their potential impact
The United Kingdom and European markets under European Securities and Markets Authority supervision are also seeking to shorten their own market cycles to T+1. This could put further pressure on Australia to move to a T+1 system or risk dislocation with other key markets.
Supporting markets in transition
Securities Services at BNP Paribas is playing an important role in assisting the transition to T+1, bringing our extensive experience from around the world to the task at hand.
During the US T+1 transition we have supported our clients globally on this move, through roadshows, webinars, and numerous thought leadership pieces to allow clients to consider options and ask for support as required.
The change has also seen a rise in demand for our Execution to Custody model. In this model, clients appoint a BNP Paribas broker who will automatically instruct the custody leg of a transaction. It gives clients comfort that BNP Paribas internalises all the mechanics of such transactions, no further client input is needed to affirm or settle the transaction. This reduces risk and potentially saves costs from late affirmation or fail fees. Beyond this, we have also assisted clients realign FX processes, including CLS, to ensure sufficient funding and liquidity to support the new settlement regime.
With our expertise and experience, ranging from sitting on the ASX T+1 Advisory Board through to our global network and execution to custody capabilities, BNP Paribas’ Securities Services business is well positioned to help Australian, New Zealand, and Asia Pacific firms not only continue to manage the recent US move to T+1, but also help prepare for when other markets move to T+1.
[1] https://securities.cib.bnpparibas/t1-settlement-ready/
[2] https://treasury.gov.au/sites/default/files/2023-06/c2023-367748-fsc.pdf
[3] https://www.asx.com.au/content/dam/asx/markets/clearing-and-settlement-services/t1-whitepaper-042024.pdf
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