As the US prepares to shorten the settlement cycle, market participants in the UK are expressing concern about potential operational, technological, and cost obstacles, according to a report from Torstone Technology.
Last month, the US finalized rule changes to reduce the settlement cycle to one business day in an effort to mitigate risks associated with the clearance and settlement of securities. A new report from Torstone and Firebrand Research, which captures insights from the buy-side, sell-side, and service provider segments in the UK, reveals apprehensions regarding this transition.
Research participants concurred that post-trade securities operations must be highly efficient and automated due to the upcoming shortened settlement cycles. Key concerns highlighted include challenges with middle-office confirmation and allocation, changes in asset servicing, and potential disruptions in securities lending flows.
With the shift to T+1 in North America, firms outside the region are under pressure to align their global operations accordingly. Participants noted that some US firms have already taken steps to address time zone issues. However, mid-tier and smaller firms that focus internationally worry about the potential loss of business if they cannot rapidly adapt to these changes.
Additionally, participants underscored the importance of buy-side engagement in preparation for the T+1 transition. Many on the buy side perceive the settlement cycle as primarily an issue for brokers and custodians to resolve. Nonetheless, inefficiencies in the settlement process could ultimately hinder the buy-side’s ability to respond effectively to market conditions and meet the needs of end investors.
The cost of implementing the necessary structural, operational, and technological adjustments for a T+1 settlement cycle was a significant concern among market participants. Sell-side firms may be faced with difficult decisions regarding whether to pass on these costs to buy-side clients or absorb them.
Virginie O’Shea, CEO of Firebrand Research, stated, “As the industry focuses on the move to T+1, the key pain points and themes are emerging for the UK market. Cost, time zones, and a lack of buy-side engagement are just some of the complex aspects that require significant collaboration across the industry.”