Ticking clock: Firms in Asia face unique T+1 challenges

The countdown has begun. In exactly four months, settlement in the US and Canada will be compressed from a T+2 to a T+1 timeframe. 

While there’s no shortage of anxiety over the pending switchover date of May 28, less attention has been paid to how Asia-Pacific firms will deal with the shorter settlement window. Firms in the region may have to extend working hours to accommodate the shift, particularly on Friday nights in Asia. 

Another challenge has to do with pre-funding trades, says a technology and operations specialist with more than 30 years of experience working at buy-side firms.

“If you’ve got to pre-fund and you’re in Asia, you don’t have much time to do that. There’s very little overlap—if any—with the US market, and now, there’s no day grace to solve that problem,” they say. 

This may lead some global asset managers to fund centrally from their Europe or London operations. This could eliminate the need for Asia teams to stay up late to deal with potential settlement issues. 

“Those asset managers that are trying to do it all from Asia will be at risk, because they just don’t have the time, nor the extra day contingency to deal with any problems, like if there’s a failed settlement or an issue with matching,” they say. 

That aside, firms in Asia are already exposed to shorter settlement windows. A head of securities services for Asia-Pacific at a global systemically important bank (G-Sib) tells WatersTechnology that Asian investment firms are already used to working with shorter settlement timeframes.

 

Those asset managers that are trying to do it all from Asia will be at risk, because they just don’t have the time, nor the extra day contingency to deal with any problems, like if there’s a failed settlement or an issue with matching

Technology and operations specialist

For example, India’s stock markets moved to T+1 in January 2023, and the Securities and Exchange Board of India is already working toward T+0. 

Also, investors participating in the Hong Kong Exchange’s Northbound Stock Connect—which connects Mainland China markets with participants in Hong Kong—must adhere to the Mainland China securities market’s T+0 settlement timeframe.

Unintended consequences

That said, shorter settlement windows within Asia versus the upcoming shorter settlement window in the US and Canada calls into question the issue of time zones.

“It’s like if you want to invest in India from the US, you’d have to pre-fund the trade, which was a complaint asset managers in the US had for ages. Now it’s the reverse—Asian investors investing into the US will have to do it on T+0, or even earlier, depending on their processes and operations,” the securities services head says.

So what are the benefits of moving to T+1? The answer for the majority—particularly for local US investors—is clear: a reduction in settlement risk.

The tech and ops specialist says this means that firms won’t be running for days with unsettled trades. “If you’ve got a counterparty default, you’re somewhat protected against that. That’s the big benefit of going to shorter settlement timeframes,” they say.

But there’s always the question of “unintended consequences,” adds the securities services head.

“These announcements get made and people are supposed to just make it work, which is happening. You don’t think about FX, you don’t think about hedging, or derivatives exposure to underlying securities in the ETF markets. Most of the world’s ETFs have exposure to US stocks—how does this settlement compression impact the ETF basket?” they say.

At their own firm, the source is tackling the challenge “programmatically,” looking at clients’ existing cut-off times and working with them to handle the new times. This includes ensuring the client has liquidity to fund a trade at any time.

“In case you’re lending out assets, how does that work? There could be implications for you if it needs to be recalled as the window to do so is shorter. For other jurisdictions, it’s just moving down by a day. But Asia-Pacific constitutes a small portion of the US right now—could the unintended consequence see people reallocating their portfolios to other jurisdictions? Maybe,” the head says. 

Available tools 

But firms have options. They will need to work closer with their systems and platform providers, custodians, broker-dealers, and clients to find solutions to ease the move.

Danny Green, head of international post-trade at Broadridge, sees T+1 as more of a middle-office problem than a “pure” back-office problem. Transaction flows, for example, look at the communicated matching instructions. 

“Today, a lot of communication from a matching point of view is done using passive communication—such as using email to resolve matching problems. Broadridge’s Nyfix Matching and the DTCC’s Match to Instruct are concepts of resolving matching and affirmation using more proactive measures. I think what the industry is starting to say is, ‘What tools can I use in order to make me more efficient and to increase matching rates?’” Green says. 

Nyfix Matching is a FIX-based solution aimed at improving post-trade processing speed and minimizing end-of-day error rates, while the Depository Trust and Clearing Corp.’s M2i workflow—part of its CTM solution—automatically triggers trade affirmation and delivery to the DTCC for settlement when a trade match between an investment manager and executing broker occurs. 

But with any tool, it all comes down to adoption, says Green, who has been at Broadridge for eight years out of his 25-year career working in post-trade and related areas.

“The tools are out there, but it’s more about what’s the adoption? People should be considering their options out there to adopt different types of tools to increase their matching rates,” he says. 

It’s not catastrophic if, say, a firm doesn’t have enough cash—or enough of the right type of cash—to settle the trade. Custodian banks can step in—but that could come at a high price. 

“The likelihood is that your custodian will cover your cash position for you but in a high interest-rate environment—which means the costs for these failures are going to be material,” Green says. 

While he believes firms, particularly in Asia-Pacific, should be evaluating their processes and seeing which should be prioritized, he says that so far, he doesn’t see firms taking any material steps to change their operational processes. 

“I think they should be doing it, but I don’t see it. Maybe that’s because we’re still in January and [T+1] is happening in May. But in talking specifically to some of the Asia-Pacific firms we work with, I don’t see materially too many operational processes being changed right now,” he says. 

For Green, firms should first assess if their existing communications with the end client are effective and efficient to ensure both systems can process the transaction correctly. Next, they should work with their clients to speed up the allocation process and, finally, agree on a process to deal with FX exposure. 

Taking lessons from the T+1 move in India’s market, large fund managers changed their booking models to pre-allocate their trades at the point of booking their orders.

Typically, an order goes to a broker, and once it is filled, the fund manager allocates that trade to the fund or funds they want it to reflect in. “In India, certainly for the large fund managers, they changed their business process and they said, ‘Based on this order, this is how I want the allocations to happen.’ That’s how the large fund managers solved for it in India. When you start thinking about the global markets, that means you need small, medium, and large buy-side clients to adopt that type of process. At present, there’s no indication that they will adopt that process,” he says. 

Apart from Nyfix Matching, Broadridge also offers the OpsGPT tool. Green explains that Broadridge continues to work on reducing any friction within operations and processing, and OpsGPT, which the firm launched on January 12, is one result of that. 

OpsGPT uses generative AI and large language model technology to provide ops users, analysts, and management teams with information based on transactions, settlements and positions data, real-time visibility for fails resolution, next best actions, and prioritizing risk items.    

For example, it enables Broadridge’s clients to ask for “All my unmatched trades that need to be solved in the next 60 minutes.” Then, the user can also ask to sort those results, say, by value. 

“As an operations user, you spend a lot of time working through the data to understand where your problems are in order to then go, ‘OK, these are the things that I need to work on, or I need to fix.’ What OpsGPT does—in a very natural way—is present the kind of things you need to be looking at, and in addition to that, once you’re using it as an organization, it continues to learn,” he says.

Green says Broadridge is currently running a proof-of-concept with seven clients to assess what benefits OpsGPT can provide.  

Perhaps the near-term consequence for Asia dealing with T+1 in the US and Canada is just to throw more bodies at the problem, the tech and ops specialist notes. How long that solution can last will depend on the capacity to hire or extend the hours of the ops team before a more permanent solution that optimizes the firm’s workflow efficiency is put in place.