T+2 is Great, What About T+1—Or Even T+0?

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Anthony Malakian, deputy editor, Buy-Side Technology

In Europe and, on a more tame level in the US, the settlement-cycle debate has been heating up. While it appears that T+2 (abbreviation for trade date plus two days for settlement) is imminent in Europe and will eventually become a reality in the States, it strikes me as odd that T+1 isn't on the table and T+0 is considered a dream.

The other day I was speaking with Alberto Corvo, managing principal and head of capital markets for eClerx, and he said that he expects a big push coming from hedge funds for pure reconciliation solutions. Regardless of what happens on the regulatory front with T+2, buy-side firms are showing significant interest in settling trades on the same day or on a T+1 basis - otherwise they face the prospect of drowning in a sea of reconciliations.

I then asked Omgeo managing director Lee Cutrone, who has been a decades-long expert when it comes to settlement cycles, why T+1 is not talked about that much on this side of the Atlantic. He noted that there was a major push in the US for T+1 back in the late ‘90s and early 2000s driven primarily by the SIA (Securities Industry Association), but the changeover, he says, was "deemed too difficult to implement at that time."

All these years later, he adds, many of those same obstacles still exist, "and the industry as a whole seems to recognize that this would be a major behavioral - and perhaps technological - shift." If T+1 is deemed too onerous, T+0 might as well fall into the same realm as a unicorn.

While it's evident that same-day settlement will not be made mandatory anytime in the near future, I hope that Corvo (who has a horse in this race) is correct and that hedge funds are actively trying to achieve faster settlement times, and by so doing, managing to avoid the reconciliation deluge.

And maybe there is indeed a change at foot. Omgeo's Cutrone couldn't verify Corvo's sentiments, but he did say that he is seeing more desire for faster matching coming from the buy side.

"The hedge fund industry has been a big part of our growth on Omgeo CTM, our central matching solution," Cutrone says. "I'm sure the pressure these firms are feeling is contributing to the upswing we have seen in CTM."

After all, isn't it better to stay ahead of the curve and be proactive, rather than dealing with the headaches brought about by being reactive?

And Cutrone's colleague, Tony Freeman, executive director of industry relations at Omgeo, says that while T+0 is not probable, there is hope for T+1 on a domestic level.

"T+1 is feasible where the trade is domestic - i.e. it's in the same currency," he says. "But for [cross-border] trades where an FX [leg] is required, the fastest timeframe is T+2, unless the FX market also shortens its settlement cycle."

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