T+2 Settlement Bandwagon Gathers Pace with Moscow Exchange the Latest Convert

Terry Flanagan

Modernization of post-trade processing is viewed as a must-have for emerging markets.

The Moscow Exchange, for example, is actively developing a securities trading system with partial collateral and deferred settlement of trades. The launch of the so-called T+2 trade settlement system is set for January. T+2 means that the trade is settled two days after the trade date.

“T+2 will change the landscape of trading in Moscow,” said Emmanuel Carjat, managing director of technology vendor TMX Atrium, which is owned by Canadian exchange operator TMX Group. “Today, trades are pre-settled [T+0], meaning that you need to put money up front in order to execute the trade.”

Countries in the European Union aim to have a T+2 system in place across all 27 member states by 2015 in order to improve efficiencies across markets and reduce rates of trade failure. Much of Europe currently uses T+3 although nations such as Germany already operate T+2. The U.S., meanwhile, uses T+3 although discussions are developing to reduce this to T+2 to allow for similarities between global jurisdictions. In Asia and Latin America, trades settle anywhere between one and three days, while Canada is also T+3.

“Moving to T+2 and perhaps ultimately T+1 will help financial firms achieve operational cost savings and risk reduction while freeing up capital,” said Matt Nelson, executive director of strategy at post-trade services provider Omgeo.” And even under today’s cost pressures, the cost at the company level is manageable.”

According to a report by Boston Consulting Group, shortening the trade settlement cycle is an achievable goal, as 68% of surveyed firms support the move — and 27% view it as a top priority.

The report concludes that the key drivers for the move are operational cost savings, risk reduction and the ability to free up capital for more efficiently reallocation.

The report estimates that it would take three years for the U.S. financial industry to move to a point where trade settlement occurs two days after the trade is enacted.

According to the analysis, the anticipated costs for such a move are manageable and would require only a three-year payback period. Broker-dealers and large firms would, on average, need to invest around $4 million and buy-side firms around $1 million to prepare for T+2.

The implementation of T+2 at the Moscow Exchange represents a necessary step forward in making the Russian on-exchange infrastructure more competitive.

“As they move to a more internationalized setting, it will drive more firms to that market,” Carjat at TMX Atrium said.

In addition, it will make Russian assets more accessible to foreign investors, enhance transaction efficiency for domestic brokers due to lower funding costs and create opportunities for improving cash management and streamlining their business processes.

The Moscow Exchange is the largest exchange group in terms of turnover and has an extensive client base in Russia and eastern Europe.

The Group was founded on December 19, 2011 as a result of the merger of Russia’s two main exchanges, Micex and RTS. The Moscow Exchange has modernized its infrastructure to trade in shares, bonds, forex, fund units, commodities, derivative financial instruments and all types of assets.

“Until recently, Micex and RTS operated two separate trading engines; those have now been merged,” Carjat said. “They are also consolidating data centers.”

Moscow Exchange was ranked among the world’s top twenty exchanges by traded volume for securities and the total capitalization of the traded stock. It takes ninth place in the list of the world’s top 10 exchanges by trading in derivatives.

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