T+2 Drives Post-Trade Automation

Terry Flanagan

The movement to settle trades in Europe two days after settlement (T+2) is driving cost savings and efficiencies in the back office, in the form of automated matching and confirmation of trades.

“The movement to T+2 is definitely bringing traction as people realize they have one less day to settle a trade, and therefore need to match the trade as early as possible in the process,” said Paul Taylor, director of global matching at financial messaging network Swift. “If you don’t match a trade, then you run the risk of the trade failing to settle.”

Investment managers and broker/dealers are using Swift messages to automate the block trade allocation and confirmation processes.

“Electronic trade confirmation is being carried out over Swift as a way to automate trades that are outside the reach of other systems, or for those institutions that prefer to use bilateral messaging rather than central matching services.

“Using the ISO 15022 messages for ETC enables institutions to achieve greater end-to-end automation and reduce exceptions,” Taylor said. “The scope for misinterpretation of key information is minimized; which translates directly into fewer queries, lower costs and fewer settlement problems downstream.”

Interbolsa, a subsidiary of NYSE Euronext and Central Securities Depository (CSD) for the Portuguese market, has chosen Swift to connect to Target2Securities (T2S), a new IT platform managed by the Eurosystem which starting in 2015 will provide physical and financial settlement in central bank money.

Interbolsa is ready to start working on the adaptation of its IT systems to the T2S platform in order to go live in March 2016.

“The decisions Interbolsa has made with respect to the T2S project are an important step that enables the company to continue serving the market with the highest standards to which its stakeholders have been accustomed.” said Luís Laginha de Sousa, CEO of NYSE Euronext Lisbon.

Luis Laginha de Sousa, NYSE Euronext Lisbon

Luis Laginha de Sousa, NYSE Euronext Lisbon

Beginning in 2015, securities transactions in European Union regulated markets will have to settle no later than the second business day after trading takes place.

This will shorten the settlement cycle by a day in most member states, creating a number of benefits but also some difficulties, according to Henry Raschen, head of regulatory and industry affairs, Europe, at HSBC Securities Services.

Possible challenges include short-term costs and risks of dismantling existing practices and complying with new practices, and overnight batch processing of trades having to become more efficient if they are to be completed in time, Raschen said in a blog posting.

Currently most trades are settled in batches and netted overnight, with firms having until the evening of T+2 to get trades into the last batch and then settling the remainder in real-time on T+3.

Under the new regime, the last batch will be at the end of T+1, which could mean fewer trades making the batch (and therefore fewer netted), and more settled in real-time on T+2.

“Longer term, batch processing itself may need to be reconsidered in favor of earlier and more frequent real time settlement, in order to promote efficiency,” said Raschen.

The U.S. and Japan currently operate on a T+3 settlement cycle, Hong Kong is on T+2, and Russia is following suit. The U.S. will probably move to T+2 in the near future, Raschen said.

Last year, the U.S. CSD, the Depository Trust & Clearing Corporation (DTCC) commissioned Boston Consulting Group to look into the costs and benefits of shorter settlement cycles. It estimated that the costs of moving to T+1 would be so high that it would take 10 years for the costs to be recouped, whereas for T+2 the payback would come after three years.

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