The UK financial market is on the brink of a major transition, moving from T+2 to T+1 settlement times for money market instruments. This shift, largely driven by global trends and technological advancements, aims to enhance efficiency and reduce risk in the trading environment.
Accelerating Settlement Times
A report by Citi from their "Securities Services Evolution 2023" highlights that 89% of market participants anticipate their markets will adopt T+1 or T+0 settlement within the next five years. This transition means that activities typically completed on the day after the trade date (T+1) would now need to be finished by the end of the trade date itself. According to the Association for Financial Markets in Europe (AFME), this could cut the time available for these activities by up to 83%, a significant reduction from the current T+2 system.
Operational Adjustments and Challenges
The move to T+1 settlement will necessitate substantial changes in market operations and behaviors. Initial steps would involve ensuring that allocations, confirmations, and trade level matching are completed by the end of the trade date. There is also a push to automate more processes like the sharing of Settlement Session Instructions (SSIs) and other trade details electronically, which would not only reduce manual errors but also operational costs. Data from CREST, the UK’s securities settlement system, shows that while 67% of settlement instructions are matched on the trade date, this will need to increase nearly to 100% to accommodate T+1 settlement. The challenges are significant, involving the re-engineering of settlement systems, greater use of real-time processing, and adoption of tools that identify inefficiencies. However, there are nuances in the application of these changes.
Primary markets
Primary transactions and private placements are exempt from these rapid settlement requirements. Technically, firms could choose not to implement these adjustments for such trades. Yet, given the extensive scope of other activities in traded money market instruments, segregating operations for primary transactions and traded bonds might be impractical and inefficient. Uniformity in operations across all types of transactions could streamline processes and mitigate confusion or delays in settlements.
Regulatory Considerations
The transition may also involve leveraging Article 5(2) of the CSD Regulation, which allows for a safe harbour mechanism until the UK aligns its settlement cycles with the EU. Such regulatory nuances need careful navigation to ensure compliance while achieving the benefits of quicker settlements.
Industry Implications
For back-office operations, traditionally under-invested in, this change represents a critical impetus for modernization. It will require new investments in technology and adjustments in standard practices which could ultimately enhance the overall robustness of financial markets.
While the underlying T+1 settlement timeline was not explicitly announced (the UK can choose a date before the end of 2027 for the final transition to T+1) the Accelerated Settlement Taskforce Report certain operational processes (allocations, confirmations and matching) that enable T+1 settlement should be in place by end of 2025.
Phased Implementation Strategy
The industry supports a phased approach, suggesting that operational changes should be mandated well before the actual transition to T+1. This would give the market sufficient time to adjust to new practices and technologies necessary for a smoother shift. This includes extended operational hours for CREST and updated market standards for various transactional processes.
Conclusion
The move towards T+1 settlement in the UK is not a matter of if, but how. As the market prepares for this significant shift, it will require coordinated efforts across technology, operations, and regulation. With careful planning and phased implementation, the transition promises to bring about faster settlements, reduced counterparty risks, and increased operational efficiency, aligning the UK market more closely with global financial practices.
About Ubermorgen
Ubermorgen is a Money Market platform that automates and STPs Money Market instruments issuance and distribution, allowing to execute T+0 (and even T+30 minutes) settlement.
References:
Securities Services evolution 2023: https://www.citibank.com/mss/docs/Citi_Securities_Services_Evolution_2023.pdf
AFME “T+1 Settlement in Europe: Potential Benefits and Challenges” 21st September 2022
Accelerated Settlement Taskforce Report. https://assets.publishing.service.gov.uk/media/6603f31bc34a860011be762c/Accelerated_Settlement_Taskforce_Report.pdf
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