Real-time: how fast is too fast? (Securities industry view)
“The CSDR has provided the legal framework to reduce settlement cycles in Europe and if necessary go beyond T+2. But other organisational and technical improvements must be made and the technical framework is not yet able to manage a move to T+0.” By Pierre Colladon, Senior Advisor in Strategy for Market Infrastructures, SGSS & Eric de Nexon, Head of Strategy for Market Infrastructures, SGSS
The industry is under pressure to reduce settlement times, driven by two different factors: the desire to mitigate risks and pressure from customers for more immediate information so they can react rapidly to market changes.
The securities value chain is complex and involves many actors from order initiation and handling, through allocation, clearing and to settlement. These actors are all interlinked and interact with each other and the customer. When we discuss real-time we need to take these dependencies into account and also define what we mean: real-time settlement, real-time processing, or real-time reporting.
There are technical and organisational boundaries that need to be considered when trying to reduce settlement times. Under a pure technical perspective, the more automated a firm’s processes are, the easier the settlement process is. If market actors are well organised and automated, a market move from, say T+3 to T+2 is straightforward. However, it must be recognised that going beyond T+2 towards T+1 and more so T+0 will be constrained by capacity limits connected to computing power, storage and data quality. Operational constraints also come into play as the entire value chain cannot in all cases be fully automated. Finally, pure geographical considerations, such as time zone differences or foreign exchanges constraints, present their own delays.
The level of investment required to further reduce settlement times is high and some firms in the investment management industry still use manual confirmation processes. This will have an impact on other firms with which the investment manager does business. If a customer uses manual processes, for example, it will be difficult for the company it deals with to react on a real-time basis. However, if all the parties in a transaction are well automated, T+0 settlement can be reached if the counterparties agree to it. Another hurdle to overcome in trying to implement real-time settlement is the difference in time zones around the world. Indeed, time is a relative concept in the securities industry, where next day payments and settlements are made in the evening of the previous day. What is real-time in this context?
Since 2008, the risks have become higher in the custody world as the value of assets under custody has increased by an annual average of about 5%. There also has been an increase in information flows between different intermediaries, which is well demonstrated by looking at SWIFT’s FIN traffic figures. In 1995 FIN messages totalled less than 2 million per day (with securities messages close to 0% of that total); in 2014 the average was 22 million per day (with securities messages accounting for 45% of that total). More information is required to deal with the volumes of settlement and the reporting increasingly required by regulators.
By shortening settlement times further, the industry will need to improve reporting and move to a real-time environment. Customers and intermediaries will need to be aware that information has been matched and trades settled with counterparties. This requires more reporting and information to be digested and the management of this information will become more complex and cumbersome.
An important question to ask is whether there is any interest in moving from T+2 to T+0 when considering the cost/benefit ratio. Given the level of investment that would be required, industry participants should be asking whether there is a benefit to shorter settlement times. We believe the returns on investment beyond T+2 settlement diminish.
“I am not sure there is real interest in the industry towards moving to real-time settlement. The industry is not yet in a position where it can be proved that there is a strong business case for it.” Eric de Nexon