The impact of T+1: Are you prepared?

Key takeaways

• As the world’s largest capital market prepares to transition to a shortened settlement cycle, time zone differences will present challenges to HSBC clients and market players around the world.
• India is one step ahead, having implemented a T+1 settlement cycle in 2023. Whilst the phased approach has been a success overall, late settlement rates have risen – demonstrating the importance of preparation.
• Technological developments will be critical when it comes to streamlining the trade process going forward, as shortened settlement cycles require increased automation and end-to-end transparency.
• While instant settlements are the likely end goal, time zone challenges mean a shift to T+0 won’t happen overnight.

Securities markets are preparing to make the transition to a shortened settlement cycle, with many countries, including the US, Canada and Mexico, agreeing on implementation dates as soon as 2024 – while some regions, such as India and China, have already made the change to T+1 or beyond.

So, what will an accelerated cycle mean for market players? What are the potential benefits – and what challenges should the industry prepare for? Leading HSBC industry experts discussed these questions and more at HSBC’s Global Emerging Markets Forum 2023.

“The main driver for the change is reducing the pre-settlement risk of counterparties not delivering on the settlement date,” says Neil Atkinson, Relationship Director, HSBC. “Decreasing the risk decreases the margins and associated capital required. Capital efficiency and liquidity improves, and costs are reduced.

“It is estimated that removing one day’s exposure to that risk could translate into a 41% reduction in the volatility component of central counterparties’ margin requirements. So clearly there are some benefits. But the change doesn’t come without challenges.”

As the largest capital market, a reduction to a T+1 cycle in the US will impact investors around the globe. With Canada and Mexico also aligning their transition to follow their large, neighbouring trade partner, 2024 is set to mark a significant shift in securities settlements worldwide.

“The US accounts for nearly 60% of the market today,” explains Adnan Hussein, Head of Agency Lending and Liquidity Services, HSBC. “US treasuries and government bonds, in general, are one of the largest asset classes traded – and have been so on a day-to-day basis for an extended period of time. The smooth transition in which those have been traded so far does lend a lot of confidence into the transition to T+1 for the equity business as well.”

Despite this confidence, HSBC’s APAC clients are facing particular operational challenges as a result of time zone differences.

“A lot of HSBC clients are Europe and Asia-based clients,” says Sophie Mullenders, Head of Custody Product for Europe and the Americas, HSBC. “So this change to T+1 is going to have a huge impact. Pretty much all clients – all investors – are exposed one way to another to the US, whether they are local or international brokers, or investment managers.

“Clients will be required to complete trade allocations, confirmations and affirmations as soon as technically possible – and no later than 9pm on the trade date, US Eastern Time. That is 2am in the morning UK time, or 9am the next day in Hong Kong or Singapore. That gives you an idea of the challenge we are facing.”

Eric Chang, Head of FX solutions APEC, HSBC, adds: “For an Asian or EMEA investor waiting to match, affirm, and then generate the orders for an execution, they’re looking at a T+0 execution window in reality. There’s a lot of concerns around this. If you get your FX incorrect it’s leading to an immediate settlement failure – which is what everybody wants to avoid.”

Avoiding late or failed settlements is of utmost priority, with the associated costs, including penalties and fines, costing the industry billions annually. So what can clients with timezone challenges do to help handle the upcoming shift to T+1 in the US?

“If you’re pre-funding your FX it’s a little bit easier, you have less to worry about. But realistically it’s about outsourcing your FX to a third party,” says Chang. “If you leave the FX to be outsourced by a custodian bank, you have fewer concerns about the funding issue. But it’s also about maintaining a US presence. We are having lots of conversations with clients about setting up a US desk.

“But there is also a potential cost increase behind expanding desks, and how they’re going to be staffed going forward.”

When it comes to implementing a T+1 settlement cycle, India is something of a first mover – having phased in a shortened cycle at the start of 2023. Overall, the new system has been a success, with the vast majority of settlements being made within a T+1 time frame. However, due to the phased approach, the late settlement rate has decreased, as players in the Indian markets reduced operational disruption as a result of the change.

“To give the market sufficient time to get used to the concept of accelerated settlements, the stocks were introduced to T+1 based on the ranking of their market capitalisation,” explains Ashwini Kanade, Senior Vice President, Product Security Services, Southeast Asia, HSBC.

“HSBC played an important role in ensuring continuous engagement with the securities market regulator and with the central bank.”

So, when it comes to accelerated settlement cycles, where is India headed in the near term?

“After the success of T+1, our securities markets regulator is now planning to roll out T+1 processes for retail investors by March 2024. After that, they want to move to atomic settlement by the end of 2024. It is the belief that following technology changes by the clearing corporations, you could move to atomic settlement for retail.”

With many stages of the security settlements still requiring manual processing, developing improved automation will be key to maximising the benefits of a global shift to T+1. Technological developments are required not only to improve efficiency, but also to provide clients with access to real-time information, and improve end-to-end transparency. This should help investment managers and brokers to better manage risk. And whilst change is already on the way, further advancements are needed.

“Technology has made one of the biggest differences from a lending perspective, over the last few years. A lot of that has come down to the way that we receive instructions, the way that we're processing requests for collateral, and the way that counterparties and agents communicate with each other,” says Hussein.

Chang adds: “I think improving and streamlining the post-trade cycle to ensure that they’re getting those FX orders affirmed and subsequently sent on for execution will be critical.”

So with T+1 either in place or on the horizon for many countries around the world, will T+0 be the next step for capital markets?

“The reality is we do work in different time zones and so going into T+0 is going to be a challenge, says Chang. “I think it’s really about whether the technology is there to support us. Will the backend support this, and will the central bank help push this forward?”

Hussein adds: “We will certainly get there. But in terms of securities, and the way that funding is currently organised, it will be a challenge. In reality, time zone differences make it a little harder to envision that happening today, but an eventual move to T+0 cannot be discounted.”

Overall, the impact of T+1 will be significant; providing both benefits and opportunities for investment managers – and in terms of the potential for operational challenges and heightened late or failed settlement rates. HSBC is primed to help support clients throughout the transition to T+1.

“We sense the nervousness of our clients and market players. But we will be ready as custodians; we will have the toolkit in order to support our clients,” finishes Mullenders.

“But we need to ensure the process works along the entire chain; there are a lot of changes to take place, particularly in terms of automation, and there is very little time left.”