The imperative for settlement efficiency: Why now?
The move to shorter settlement cycles (SSC) in the US, Europe and other major markets has been accelerated by the experience of the global financial crisis. The SSC initiative will occur in Europe first through the CSD Regulation, with the US likely to follow. It is expected that this will drive some Asia-Pacific markets such as Australia and Japan to move from T+3 to T+2 or less.
Benefits of shorter settlement timetables
Regulators, policymakers and market participants recognize the benefits of SSC as reduced risk, lower operating costs and increased liquidity. And recent research from Omgeo shows that over 70 percent of survey respondents believe that SSCs are beneficial to the industry.
A reduction in counterparty risk was cited as the most important benefit of T+2, but there is also a strong business case for accelerating settlement: reducing the amount of time assets are tied up in the settlement process means participants can reinvest faster, as well as manage their capital more efficiently.
State of readiness
Despite the support for SSC, many middle and back offices are not currently prepared for a move to T+2, particularly in smaller and mid-sized firms. This lack of readiness could create compliance and operational issues that gain board level and regulatory attention.
Buy-side firms need to focus on getting the right mix of technology, processes and infrastructure in order to achieve SSC. According to research, timely receipt of trade details is considered to be the most important factor in achieving T+2, which makes the case for same day affirmation (SDA) as best practice. SDA is a process where trades are verified on trade date.
Omgeo continues to work with the industry to provide solutions that help market participants achieve SDA and SSC.
“Recent research from Omgeo shows that over 70 percent of survey respondents believe that SSCs are beneficial to the industry” Tony Freeman
Tony Freeman is global head of industry relations at Omgeo. Formed in 2001, Omgeo is jointly owned by the DTCC and Thomson Reuters.
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