T+1 paves the way for modernized settlement

This article was first published on FTFNews.com and is reprinted here with permission.

As firms prepared for T+1, they reviewed the components of settlement and modernized when and where necessary. Ruane told FTF News the industry is reaping the rewards from T+1: reduced counterparty risk and improved settlement in custody, securities clearance and securities finance. He also discussed settlement challenges and opportunities to come in European and Asian markets, as well as through the coming expansion of the U.S. Treasury central clearing regime. 

How has the T+1 transition changed the market infrastructure for North America?

At the end of May, the U.S. securities market moved to an accelerated settlement cycle of one day after trade (T+1), for equities, corporate bonds, municipal bonds, unit investment trusts and financial instruments that are comprised of these security types.

After more than three years of rigorous planning, the industry is beginning to recognize the benefits from reduced settlement risk across U.S. capital markets.

BNY, together with clients and other market participants, committed resources and investments to prepare for T+1, such as the development of new enhancements to products and producing many hours of client and internal facing educational content.

This was done to ensure that our clients, our counterparties and BNY were ready to handle the challenges of a compressed timeline between trade, execution and settlement.

In my view, the move to T+1 has positioned the U.S. markets to grow, to improve liquidity, and, on a risk-adjusted basis, to be among the leading markets for settlement and liquidity.

In short, investors and clients now receive the proceeds of their transactions one day earlier, resulting in a more efficient market with reduced counterparty risk and increasing capital efficiency.

While market participants are mindful of some of the operations and liquidity pressures placed on industry participants, it does appear that some benefits are beginning to be realized. However, it is still too early to fully assess the market impacts of T+1.

What opportunities has T+1 created? Conversely, what kinds of challenges has T+1 created?

The primary benefit of the shift to T+1 is reduced counterparty risk and improved settlement in areas such as custody, securities clearance and securities finance.

The T+1 transition has helped our clients to focus on the lifecycle of a trade, as well as what comprises clearing and settlement.

In preparation for T+1, we as an industry went back to the basics to ensure that all components of settlements were considered, updated and modernized appropriately to facilitate the move to T+1. T+1 improves liquidity in the U.S. markets by improving the velocity of securities and associated cash movements.

Settlement risk improvements should lead to capital efficiency as well as reduced deposits and margin at financial market utilities.

As for challenges, the change in the settlement process has initially presented some challenges for firms in different time zones from an operations, liquidity and settlement perspective.

What are your clients doing to cope with similar settlement challenges and risks to come in European and Asian markets?

While T+1 has been successfully implemented, the market remains vigilant from a risk management perspective.

Some industry participants have experienced increased funding costs due to the difference in settlement time between the U.S. and the E.U. To help offset these challenges, BNY has developed an intraday tri-party repo capability that will help clients bridge the potential funding gap.

This solution will allow clients to leverage our collateral platform to source funding in shorter timeframes. So, in as little as one hour, clients can get all the benefits of            tri-party collateral management and can also raise funding.

As a result of T+1, we are seeing increased interest in our outsourced clearing services by financial institutions outside the U.S. who wish to take advantage of robust clearing solutions in accessing settlement in the U.S. equity market.

What kinds of new investments and operating model improvements are needed to support shorter settlement cycles and advances in clearing?

Recently, the “T+1 After Action Report,” which was published by SIFMA (Securities Industry and Financial Markets), DTCC (Depository Trust & Clearing Corporation) and the Investment Company Institute, concluded that global market adoption of T+1 should be the focus for market participants, policymakers and regulators prior to a fundamental reworking of securities operations that would be required in order to move to a shortened settlement cycle of T+0.

As a result of T+1, clients are certainly reviewing how they access clearing and settlement in T+1 markets.

In my opinion, T+0 is still in the future.

What should the industry focus on as the industry shifts to an expanded U.S. Treasury central clearing regime?

Change in U.S. market infrastructure continues post T+1, with the industry now shifting its focus to the next significant market infrastructure impact: the implementation of the new U.S. Securities and Exchange Commission (SEC) rule to expand the central clearing of U.S. Treasuries.

The U.S. Treasury central clearing mandate was announced in December 2023. Our clients are reviewing the SEC mandatory clearing rule and the central clearing access models that are offered by  the Fixed Income Clearing Corporation (FICC) and other Central Counterparty Clearing houses (CCPs).

It may seem that there is plenty of time before the mandate needs to be implemented — December 2025 for cash trades of U.S. treasuries and June 2026 for repo trades. However, time is of the essence. Since this mandatory clearing change involves the largest and most liquid securities market in the world — the U.S. Treasury market — the work associated with compliance with this rule may be time consuming.

BNY is committed to supporting our clients during this transition, not only with solutions, such as our agent and sponsor clearing solutions that will allow them to meet the requirements of the central clearing mandate, but also with insights. 

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