Challenges: what’s holding preparations back?
Do not rely on US preparations
You’ve warned us about a risk of complacency in the market, thanks to the success of the US move to T+1 in May 2024.
However, the US move benefitted from a long lead time and detailed planning for T+1, as well as centralised post-trade infrastructure.
Participants cannot simply rely on their preparations for the US move to T+1, as the UK has distinct and separate post-trade arrangements.
For example, in the US, T+1 was focused on a key deadline for completing affirmations, and responsibility for meeting this deadline was placed on broker-dealers. In contrast, the UK does not have an affirmation process and responsibility for pre-settlement actions is much more dispersed across the settlement chain.
The complexity of settlement across Europe also increases the challenges. As well as cross-border settlement, there are multiple central securities depositories (CSDs), central counterparties (CCPs) and currencies.
Clients and counterparties
Your settlement performance will only be as good as the weakest link in your chain of clients and counterparties.
While many participants are confident in their own preparations for T+1, they’re concerned about the level of awareness of clients and counterparties – especially those overseas, such as Asia-Pacific clients.
Work with your counterparties, clients (particularly smaller or overseas), trading venues, CCPs and CSDs to make sure they have suitable arrangements in place to settle their transactions. This will be particularly important for custodians with smaller firm clients on the buy-side.
Securities lending
A key challenge for participants for T+1 settlement will be having to borrow, collateralise and settle securities on the same day.
Effective inventory management will be crucial. Accurate data for place of settlement (PSET) and place of safekeeping (PSAF) will be key tools. Crucially, you should know where your securities are located when you execute a trade.
Keep an eye out for AST guidance on how to use PSET and PSAF data.
FX transactions
We know market participants are concerned about FX transactions too, whether about T+1 further compressing existing time-zone challenges, or cut-off times for Continuous Linked Settlement (CLS).
For guidance on how to settle FX transactions in a T+1 environment, visit the AST website.
Settlement instructions in CREST
Euroclear UK and International (EUI) offers various options to help you manage and settle matched transactions more efficiently (such as hold and release, and splitting). However, we’re aware that participants use the CREST system in different ways.
Some participants delay inputting – and, therefore, matching – their settlement instructions in CREST until they receive the securities to settle those instructions. This could delay other participants from settling their transactions and disrupt settlement more widely.
Consider how you can use the CREST settlement functionality to:
- Instruct and match settlement instructions as quickly as possible.
- Manage the release and settlement of securities.
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