Waters Wrap: T+1 and too many proposals

For all the pain that was caused by the 2008 Financial Crisis, many lessons were learned, too. I mean, sure—did any bankers get sent to jail as a result of defrauding the American public? Well, there was that one guy, but other than that, golden parachutes rained down across Wall Street as Main Street shuttered stores and foreclosed on homes.

BUT…there’s a bright side! Indeed, banks learned that their data was too siloed, and their systems were unable to communicate important information throughout the organization. This led banks to overhaul systems and eventually embrace cloud, SaaS, managed services, APIs and AI and open-source tools—etcetera, etcetera. So, if you think about it, everything worked out in the end, right?!

Fine…that’s an extreme oversimplification of the last 15-plus years. Forgive me, as I write this, snark is my muse. But the point stands: the Financial Crisis forced capital markets firms to eventually, begrudgingly, embrace technologies they would’ve balked at in July 2007. Plain and simple, since the rollout of the Dodd–Frank Act, Mifid II/Mifir, and a raft of other rules, regulatory reporting needs have forced firms to break down siloes and connect systems. And the regulations keep on coming, leading to the need for more innovation (hello, generative AI!).

A little over three months from now, T+1 settlement will be mandated for North American markets. This despite the fact that organizations like the Securities Industry and Financial Markets Association (Sifma), the Association of Global Custodians, and the Canadian Capital Markets Association were pleading with the US Securities and Exchange Commission to delay the go-live date until at least September of this year. (Gary Gensler to trading firms: Drop Dead!)

As banks, asset managers, exchanges, and vendors in North America have learned, the move to T+1 is even more complex than the move to T+2 in 2017, which, to be fair, went down largely without a hitch, though talks about T+2 date back to the turn of the century, so the industry had a bit more time to prepare. (Technological evolution!)

The reason why the move is more complex is largely because previous changes in settlement involved removing a day from the cycle between trading and settlement, but moving to T+1 means removing what was essentially the only full business day between them. This requires firms to build in a “high level of automation or straight-through processing,” experts told WatersTechnology at the start of last year. “So now it requires a high level of automation or straight-through processing, and you just don’t have time to manage a significant number of exceptions,” says Peter Tomlinson, head of post-trade at the Association for Financial Markets in Europe. “It’s an ambitious timeline, and it’s going to be a challenge.”

A challenge…or, as an operations manager at a smaller broker told WatersTechnology just a few weeks ago, it’s going to be a disaster: “In a nutshell, everyone in the outside world just thinks that trades can settle instantly; they don’t understand the amount of work that goes into trade settlement. Everything has to be perfect for it to happen. To say, ‘Just settle a day earlier!’ sounds easier than you think. It’s gonna be a disaster, in my opinion.”

‘No longer if, but how and when’

Whether it is a disaster or this is just the industry crying wolf—which isn’t, like, unusual—T+1 will be the law in North America soon enough. Now, as a red-white-and-blue blooded, hegemonic American, this is hard for me to write…but what about the rest of the world? Well, I’m glad I asked myself that question to easily set up a “smooth” transition that will allow me to highlight two stories we published last week. 

First, let’s set sail across the Atlantic. At the end of January, the European Commission hosted a roundtable where Mairead McGuinness, the EU commissioner responsible for financial services, said, “When it comes to T+1, the question is no longer if, but how and when it will happen in the EU.”

Apparently, the industry associations and speakers in attendance (largely) agreed with this sentiment. As Theo Normanton writes, many EU investors are heavily exposed to US equities, so a misalignment in the settlement period will create funding problems as firms have to put down cash for US transactions before the necessary liquidity is freed up by asset sales or fund purchases in the EU.

Oh, and let’s face it (my words, not Theo’s): firms in Europe are always afraid of falling too far behind the US in the race to innovation (even if the Eurozone moved to T+2 three years before the US) and becoming uncompetitive with ’Murica. (For the kids at home, the Eurozone once involved Britain before a thing called Brexit, which, among so many other things, split the UK from Europe…politically…I’m assuming not geographically.) 

Editorializing aside, if the EU is pushing forward with T+1, I’d like to highlight one comment made during that EU meeting. Emiliano Di Giammatteo, COO for asset and wealth management at Generali, which manages more than €500 billion (~$540bn) of assets, said firms could improve their operations by integrating smart automation, analytics software, and AI, but warned that this would entail a transfer of risk and costs onto asset managers.

“How can we minimize implementation and running costs? First of all, by leveraging more technology—primarily a higher degree of smart automation and artificial intelligence integrated into the existing processes. Trying to optimize existing processes with robotic process automations (RPAs) instead of fully migrating the operating platforms toward the new system, therefore adopting more of a continuous improvement approach, rather than a full migration,” he said.

In Generali’s case, Di Giammatteo added: “One area that we are going to look at in the coming months is automatic solutions for the update of standard settlement instructions into our master data management systems. But this is not going to be enough, and we also need some industry answers. For example, we believe that there is room for improvement in the automatic resolution of central trade matching (CTM) mismatches on the standardization of the matching process that would envisage, for example, the pre-matching of the standard settlement instructions at the CTMs.”

First, let me say that I completely agree with the core of what Di Giammatteo is saying: the only way to answer regulatory requirements in the modern markets is through technology and automation. And a buy-side firm like Generali likely has a more unified approach, organizationally, to addressing budgetary demands, year on year. But think back to that operations manager at the smaller broker-dealer that said T+1 implementation will be a disaster: that company’s budget is minuscule (I would assume) compared to that of a major European insurance firm. Not only that, but even at the largest banks, the budgeting process is cut-throat and broken down by silo (even as we say that siloes are disappearing…which, they are, but they’re also not). 

So I found the first part of what Di Giammatteo said to be truthful, but it also misses the mark—who has the budget for these tech upgrades? “New regs? Simple! Just throw some money at it and automate systems!” It’s what firms should do…but in practice? The root cause of the problem is poor data management and governance, and no regulation will force a firm to solve those issues. 

And to the second part of what Di Giammatteo said: “One area that we are going to look at in the coming months is automatic solutions for the update of standard settlement instructions into our master data management systems.” Dear God, I hope we’re not talking about blockchain/distributed ledger technology. 

Again, let me be clear—these statements represent the right thinking. And Generali might be ahead of the curve (we’ve established that I’m an American and don’t know anything about the rest of the world, so I can’t speak to Generali’s practices). The problem is that if regulators are listening too much to the people who can spend and not enough to the people who cannot, that’s how “disaster” happens. 

T+1…within a few hours?

Ok, let’s keep traveling east to Asia.

Similar to the EU, as the US (and Canada and Mexico…of course I didn’t forget) move to T+1, firms in Asia are faced with the challenge of pre-funding trades. “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,” a tech and ops specialist with more than three decades of buy-side experience told Wei-Shen Wong. 

Essentially, if you thought Europe was awkward from a timing perspective, Asia might be worse as the challenges are even more complicated in Asia, according to a head of securities services for Asia-Pacific at a global systemically important bank (G-Sib). 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, for instance, 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. And now, even more time zone questions are being thrown into the equation.

“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.

To paraphrase the point that the operations manager of the US broker said—non-tech and ops people don’t think about what actually goes into settling a trade. This G-Sib securities head is saying something similar.

“These announcements get made, and people are supposed to just make it work, which is happening,” they say. “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?”

Now, there’s a good chance that my snark will look silly come May 29, 2024, which is the day after T+1 goes into effect in North America. But I guess my point is this: At least in the US, it took about two decades to go from T+3 to T+2; it will only take seven years to go from T+2 to T+1, and there’s already (idiotic???) saber rattling about T+0 (BLOCKCHAIN!).

The problem, as I see it, anyway, is that the pace of technological innovation—and the snake oil salespeople permeating the vendor and consulting spaces—is rapidly growing. Bank and asset manager technologists want to push back on ideas coming from business and compliance folks, but that can cost them their jobs. And a regulatory mandate is just that—it has to be answered. But what happens when the regulators lack a proper technological understanding of what goes into, say, settlement? 

Well…some might say “disaster” happens.

Think I’m way off? Listening to too many naysayers? Missing the point? Let me know: anthony.malakian@infopro-digital.com.

The image accompanying this column is “Two Figures at a Door (The Proposal?)” by James Tissot, courtesy of the Cleveland Museum of Art’s open-access program.