As a financial market infrastructure (FMI) supervisor, the Bank of England (BoE) expects relevant FMIs to prepare for and implement necessary changes for a move to T+1, maintaining operational resilience throughout, changing their rules and systems, and facilitating preparations by their members, said Sasha Mills, executive director for FMI at the BoE, in a recent speech.
The BoE estimate that accelerated settlement will release margin on the order of £1 billion and should reduce the costs and risks associated with the existing misalignment of settlement cycles. The UK’s settlement cycle is currently misaligned with the cycles in jurisdictions (such as the US) which have already transitioned to T+1 settlement. A successful transition will be made more likely if firms (sell-side firms, buy-side firms, FMIs and others) automate their settlement processes and systems, some of which are still manual in nature.
“In the weeks ahead, I encourage firms, their senior executives, and boards to prioritize this work and seek the necessary budget for system adaptations,” she said. “And after these adaptations are implemented, firms must test and mitigate any issues arising from these adaptations and any new process flows well ahead of the transition date.”
She highlighted settlement instructions as one of the challenges and referenced the Financial Markets Standards Board’s (FMSB’s) recent publication of standards and templates as a step towards resolving issues.
For many years, the industry has recognized issues with these instructions, in that settlement processes can get “snarled up” and even fail due to instruction formats not being standardized and instruction submissions not being automated, often involving manual processes. “Market participants should read the FMSB report and adopt their recommendations,” she said.
Mills also discussed the desirability for the UK and other jurisdictions (including, for example, the EU and Switzerland) to coordinate and align timetables on the transition to T+1.
“There are obvious benefits to alignment and we are pleased that the UK, EU and Swiss are working towards transitioning on the same date – 11 October 2027,” she added.
FX and time zones
This cycle shortening (unless carefully planned and executed) runs the risk of creating challenges for market participants such as investors and intermediaries which are many time zones away.
Adding to the complexity here is the fact that participants in other time-zones will often have an “FX leg” and FX settlement to organize in addition to organizing the settlement of the underlying securities purchase or sale.
Vikas Srivastava, chief revenue officer at Integral, said in emailed commentary: “T+1 significantly compresses the timeframe for sourcing FX to settle equity trades. Firms can no longer afford to wait — seamless integration between equity and FX systems is the only way to keep up with the new settlement cycle.
“While the burden largely falls on asset managers, there is an opportunity for banks to play a greater supporting role for their asset management clients in navigating these challenges, by connecting their FX price discovery and execution services via APIs to the asset managers’ FX OEMS systems.”