Some 58 per cent of firms in Asia Pacific are not prepared for a shorter settlement cycle in Europe which will change from trade date plus three days (T+3) to trade date plus two days (T+2) in October.
That’s according to a study by Celent, which was commissioned by Omgeo. Of the firms surveyed, approximately one in six firms has not started to implement necessary process and technology changes to operate in a T+2 environment.
The study also revealed, just weeks before the 6 October implementation date in Europe, that 19 per cent of firms are not aware of the impending move to T+2. The issue of preparedness is significant with 56 per cent of firms citing penalties for non-compliance as a major risk, while 38 per cent of firms are concerned about failed trades and increased operational costs, according to the study.
Matthew Chan, head of Asia strategy at Omgeo, says: “In Asia-Pacific, a shorter European settlement cycle will be particularly challenging due to operational complexities associated with time zone differences. For firms with significant European trading activity, automating processes is critical to meeting the T+2 deadline. It is also important that firms match trades on local T+1, as the current T+3 buffer for managing mismatched trades will cease to exist within the new compressed cycle.”
Shortening the settlement cycle in Europe is partly driven by the upcoming implementation of the Central Securities Depositories Regulation (CSDR) — in development since 2012 and adopted by the European Council in June 2014 — and Target2Securities, the new European settlement engine.
The CSDR applies to market participants located outside Europe, which means that securities trades executed on European venues by firms in Asia-Pacific will be required to adhere to the T+2 settlement cycle. Time zone differences with Europe effectively mean Asia-Pacific will be on a tighter post-trade schedule than locations in Europe.
The report also found that 73 per cent of firms plan to change their processes to meet the T+2 requirements for Europe, while 64 per cent indicate they will need to upgrade their post-trade technology.
More than half (56 per cent) of firms cited penalties for non-compliance as a key risk with 38 per cent also concerned about increased operational cost.
Some 67 per cent of firms said investment managers are the least prepared segment for the move to T+2.
Neil Katkov, author of the Celent whitepaper, says: "The move to a T+2 settlement cycle in Europe is an initiative of unprecedented scope which makes greater operational demands on firms. Without careful preparation, firms may experience greater operational risks. While many market participants are not yet fully ready, it is encouraging to see that over 80 per cent of respondents are aware of the imminent changes and that firms are starting to think about and make the necessary preparations to comply with the deadline.”