By Zoë Balkwell, Head of Pre-Trade & Trading 

The international picture is considerably more complex than the US transition in May 2024 

When the US transitioned to T+1 it had a lot going for it. Collateral was limited and largely domestic, the market is relatively simple, and the chain of participants is less global. It’s not that simple for the rest of the world come October 2027.

There are a lot more countries, complexities, and global participants involved in that chain. To name a few: multiple beneficial owners, regional collateral pools, CSDs, and time zone constraints. If your systems aren’t automated, the inefficiencies in the workflows make the delicate dance of settlement in the international space into a much clumsier shuffle. 

Fix the foundations before you build the tower

 So where to start? For firms working toward the T+1 transition date for the UK, EU, and Switzerland, focus should be on working through inefficiencies within their existing setups.

Rather than reaching for a new, futuristic solution, firms should analyse their systems and internal capacity, then work with a partner to identify the gaps and what’s attainable in the next year or so.

Choosing a vendor partner that can support and streamline these processes means firms can already achieve sub-30-minute trade-to-settlement today – in other words, T+1 and T+0 ready.

We’ve still got time in the next year or so to work out those issues – but firms have to get that foundation right first. Otherwise, they’re not going to be able to build off it. 

You're only ever as good as your weakest counterparty

Tier-one firms can have inefficiencies, but they have the funds to implement new things quickly. However, if they have a counterparty that’s still largely manual, which is releasing loans by hand and not using automated loan release functionality, the tier-1 desk can wait hours for that counterparty to release a loan instruction once they’ve got the collateral. That’s not efficient for anyone.

As Roy Zimmerhansl of WTS Hansuke explained during a recent pirum webinar:

"You're only as efficient as your least efficient counterparty and, so, you can have all of your processes as STP as possible internally, but then when you go to that market-facing counterparty, the truth is, if they're not together on their side, it looks bad on you, right? All of your work on the efficiency side disappears, and you all of a sudden get that financial friction."

The EU T+1 Industry Committee’s own survey data bears this out: dependencies on counterparties, intermediaries, and technology providers ranked as the top implementation challenge for 64% of firms, while “only up to 40% of the settlement intermediaries have high confidence in their client’s readiness.” The industry already knows where the friction sits. That’s why, in the next year, our objective as an industry should be to get everyone across the line and prepared for a T+1 world – potentially even T+0, once time zone differences are factored in. We need good connections and relationships across every market participant. 

A two-tier market is a problem for everyone

If we don’t, as the timeline to T+1 day shortens, we will see a bifurcation: firms with the deepest pockets will be fine, but smaller participants who can’t keep pace risk being forced out of the market entirely.

That’s why we need to support all players to get to a point where lending is sustainable and worthwhile for everyone. If the barrier to entry becomes too high, smaller and new participants will conclude the effort and risk isn’t worth the reward, meaning less pockets of liquidity and reduced business growth for the industry.

A lot of the bigger banks are doing a really good job of helping and supporting their newer trading counterparts, sharing their information and their experiences of setting up new markets and the nuances of securities lending. But there’s still a long way to go.

Consider the challenge facing some of the market’s newer participants. Firms in markets with different business weeks – where Sunday is a working day, for example – are now reviewing their business days to function in a T+1 world. Understandably many of these firms want to trade outside their local markets, so supporting all timeframes and process flows becomes more complicated. All participants in the chain need to be able to support those processes too, so shared education and mutual support are paramount.

These new participants bring new liquidity and act as a flagship for others who may follow them, yet they’re now also under pressure to change everything they know for a T+1 world. 

This is a three-legged race, not a 100-metre sprint

The overarching message is this: moving to a T+1 world is not going to be as easy as what we saw in the US. This is our time to step up as an industry, globally, and make sure that everyone can get to the same T+1 readiness line at the same time.

It’s a three-legged race. If the person you’re tied to falls down, you’re not going to get across the line. We need to help everyone over. If smaller participants can’t make it to the finish line, liquidity draining from the market is a risk for everyone. It’s therefore in the interest of everybody to work through this together.

Pirum is uniquely positioned to help your team assess your systems and prepare a practical T+1 readiness roadmap for your firm and your counterparties, so that every desk can reach the settlement deadline in a controlled, prepared way. To set up your T+1 readiness assessment get in touch. 

Also included in the Quarterly Panorama:

 - Ben Challice on how Pirum's #AI virtuous cycle has moved from thesis to working proof point – and what that means for your firm. 
- What does the AMI-SeCo #CorporateActions guide mean for your firm? Asks Payal Lakhani.
  

The Panorama also includes a regulatory and events calendar and a product news section.