Benefits of T+1
1. International alignment
The benefits of international alignment include an increase in efficiency for cross-border trades and avoiding the additional cost of misalignment as other jurisdictions move to T+1.
2. Market resilience and reliability
T+1 settlement allows holders of securities to realise cash more rapidly. In a stressed market participants may need to raise cash rapidly by selling securities.
The ability to receive cash on T+1 is a benefit during such periods thereby improving the resilience of markets and participants. These benefits are of course dependent on the transition to T+1 being implemented effectively and minimising the risk of increased settlement fails.
3. Reduction in market and credit risk and associated costs
Another key benefit will be the overall reduction of risk. In the time between a trade being executed and settled, there is a risk that the parties to the trade may not fulfil their obligations.
There is also a risk of heightened volatility especially in stressed market conditions that may impact the transfer of cash or ownership of securities. The longer the time to settle, the greater the risks.
In a T+1 settlement environment there will be 24 hours less exposure and so counterparty and market risks will be significantly reduced. In turn, this reduces the number of unsettled trades at any point in time. By way of example, a major element of the Lehman insolvency (when the settlement cycle was T+3) was resolving three days of unsettled trades.
Operational risk will also be reduced by implementing automation and STP across post-trade operations, decreasing the manual errors in Allocation and Matching that may cause trades to fail.
Reducing the settlement cycle should have a knock-on impact of reducing margin and collateral requirements for clearing members on transactions clearing through a CCP.
This is cited as one of the major benefits expected by the US as it prepares for the move to T+1.
Risk model simulations in the US have shown that volatility margins could be reduced by up to 41% as a shorter settlement cycle helps with balancing risk-based margining and reduced pro-cyclical impacts (DTCC).
4. Incentive for investment in automation
An important benefit to the broader post trade ecosystem of moving to a T+1 settlement cycle is that market participants across all sectors of the industry will need to upgrade their technology and operational infrastructure, increasing automation and exploring new collaborative solutions offered by industry vendors.
Increasing the number of processes that are automated will not only reduce manual errors in Matching and processing of Trade instructions but also reduce the time taken to process trades. Increasing the efficiency of processing will deliver operational cost savings.
It can be difficult for back offices to attract investment in post-trade processing and the presence of a market imperative to act will accelerate the industry’s modernisation trajectory.
In other jurisdictions, investments have included:
- Re-engineering of settlement system architecture to bring process steps from overnight batch mode into intraday processing or to bring batches earlier in the settlement period;
- use of process mining and interrogation tools to build a greater understanding of inefficiency in settlement processes and to identify the causes and location of friction and delay such as client or product data issues, client communication weaknesses and workflow delays;
- incentivising clients to change behaviours that delay settlement such as the use of faxes, emails, and PDFs to communicate SSIs, Allocations and settlement instructions; and
- driving the adoption of pre-Matching solutions to increase speed and reliability of settlement processes.