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Navigating the challenges of global markets moving to T+1

Navigating the challenges of global markets moving to T+1: How a strategic approach can help market participants

The imminent shift in settlement cycles by major North American markets from T+2 to T+1, scheduled for 28 May this year, is causing widespread concerns among Australian brokers and market participants.

The move to T1 is underway with hopes this change will increase efficiencies, reduce counterparty risk, optimise lower margin costs, deploy capital more effectively, enhance system security, as well as increasing liquidity and volumes. But with cash and equities exchanging poised to settle a single day after a trade is made this will push North American markets one full day ahead of Australia, which will remain on the old T+2 system.

As the world’s financial landscape evolves, the misalignment between Australian and North American markets presents operational challenges and potential financial risks at a time when investors are increasing their exposure to global equities.

The move to T+1 settlement in the US and Canada introduces operational complexities for Australian brokers, wealth managers, and other market participants. The shortened settlement cycle leaves less time for error detection and correction. For firms lacking the necessary resources to process settlements in shortened timeframes, or for those that rely on manual processes and overnight batch processing, the move to T+1 could lead to an increase in the late settlement rate. The industry is already experiencing a 5% failure rate in settlement, costing billions of dollars. This figure will likely rise with the impending change.

One of the critical concerns is the impact on security deposits and risk management strategies. Currently, Australian brokers often use proceeds from local settlements to trade into the US and Canada. With the shift to T+1, this could result in brokers needing larger security deposits, affecting their ability to deploy capital elsewhere. This may lead to consolidation in the market, as smaller players find it challenging to meet increased collateral requirements.

And the financial repercussions extend beyond security deposits, with rising costs of capital and other fees expected to be passed on to customers. As a result, more traders may opt to access markets directly, bypassing traditional custodians and wealth platforms. This shift could prompt financial planners to explore alternative trading platforms or broker dealers to access US markets, driven by cost considerations and the complexity introduced by the T+1 settlement change.

Regulatory considerations weigh heavily

The transition to T+1 settlement also raises regulatory considerations, necessitating changes to comply with new rules and regulations. Brokers will need to navigate potential regulatory hurdles to ensure a smooth transition to the accelerated settlement cycle.

We are actively advising our own clients on the implications of the T+1 shift and introducing new services to help them mitigate risks. To address the operational challenges, brokers and managers will need to settle faster and more efficiently than in the past. This involves having cash and stock readily accessible on the platform and leveraging technology, such as real-time international payments, using the NPP, and deposits – linked multi-currency accounts or wallets – to avoid the need to leave cash on account in the North American markets all the time.

FinClear’s new products and services are specifically designed to address the challenges posed by T+1 settlement. This includes an internal FX desk for near-real-time international payments, routes into global markets for smaller brokers, and an integrated TradeCentre platform for real-time order placement and monitoring.

Relationships are key to navigate the T+1 global landscape. For us this has meant leveraging our extensive global relationships with leading US broker-dealers and global custodians to provide market participants with a single point of contact. This strategic approach streamlines processes and minimises touchpoints, offering a scalable solution for accessing T+1 markets.

The question of when or if Australia will realign its settlement cycle to match Wall Street remains unanswered. The ASX, actively consulting on the issue, has formed a working group involving key industry stakeholders to explore the impact and potential benefits of a shorter settlement cycle. While Australia faces challenges, including a delayed CHESS replacement program, we are confident in Australia’s capabilities to adapt and align with global standards.

As global markets transition to T+1 settlement, Australian market participants must proactively address the challenges posed by the misalignment with North American markets. Our own strategic approach involves focusing on advising clients, introducing innovative technological solutions, and utilising our extensive global relationships to navigate the complexities of the evolving financial landscape.

While uncertainties remain, the financial industry’s ability to adapt and embrace change will determine its resilience in the face of evolving global market dynamics.

This article from Andrea Marani, CEO Execution & Clearing for FinClear made the cover of this month’s Stockbrokers and Investment Advisers Association March Monthly. Read the March edition here.