Chris Smith and Camille McKelvey, Trax


With T+2 on the horizon, the market is confronted with how best to manage efficient settlement processes and reduce operational risk. 



Over the next two weeks firms will need to put the final pieces of the puzzle together ahead of the market migration date of October 6th 2014 to T+2 settlement.  Teams across trading, risk and operations are being forced to think about how they will address some of the key aspects of CSDR Article 5 before the cash markets move to T+2 and the repo market moves to T+1.  For many this has meant an increase in operational cost. To ensure this doesn’t result in a long term increase in operational risk, it is necessary that the infrastructure to support the post trade workflow is both automated and scalable and that the workflow is carefully reviewed both intra firm as well as across the industry to maximise efficiency.



Scope of CSDR T+2 and how to handle it...

With T+2 just around the corner, firms should be putting the finishing touches to the scope of securities they are migrating by default. Defining instruments migrating to T+2 has been a tough one, at least for fixed income where some industry participants continue to question the scope of instruments included in the move to T+2 vs those remaining on T+3.


Trading venues are converging towards keeping US ISIN prefixed bonds on T+3 but with some of these instruments settling in the European (I)CSDs some firms may consider some of these instruments part of the European market and hence have a preference to settle them on T+2. Additionally, questions continue to be raised regarding treatment of 144A and Reg-S bonds, which under an ISIN prefixed based implementation will have a combination of T+2 and T+3 default settlement. Some are questioning the rationale for different settlement dates of different tranches of the same issue.



Implementation of defined scope…

Once you have decided what securities are in and out of scope for migration, there are internal operational issues that must be considered, and it is at this point inconsistencies could prevail. Different systems may take different data feeds from different providers who may not necessarily all have the same interpretation of the scope. An example could be a difference between pricing engines and settlement engines. If your firm identifies this as a potential operational issue, you will need to address how to deal with the reconciliation of these different data feeds. If these processes are not managed appropriately, we would expect to see an increase in the volume of operational exceptions. These exceptions will need to be resolved quickly to mitigate risk and P&L implications.



Different settlement preference across the market…

Anecdotal evidence suggests dealers are embracing T+2 settlement while some investment firms managing global funds may have challenges in fully migrating to T+2.  This could lead to a smoother migration in the interdealer market than the institutional market.  Dealers will need to think about whom their clients are and to what extent they need to support non-standard settlement dates. 


There is then the further consideration of the funding implication to the market where one party is buying on a T+2 basis and the counterparty of the trade is selling on T+3. It’s very likely the repo market will help cover the additional funding requirements for the one day lag, but the cost of operating under this kind of structure will be quite significant- who will be responsible for bearing this cost? Although the answer to that question remains to be seen, it’s clear that repos have the potential to become even more important in the market to ensure that cash positions are properly funded & stock lending / borrowing is likely to increase as firms search for assets to meet disconnected delivery timeframes.



A solution to help reduce operational risk…

While many questions still need to be resolved, and when combined with the effect of other new regulations due to hit the industry in the coming years (such as Basel III and MiFID II), it’s clear operational processes will need to  be modified to accommodate the new reality of shorter settlement cycles, whilst ensuring operational risks are managed effectively. Trade date affirmation is key to stop dependent activities being impacted at a significant cost to firms both from a labour driver perspective but also as a direct impact to P&L. In fact the industry shouldn’t stop at “Same Day Affirmation” but should strive to adopt a sub 15-minute trade match of transaction details following execution, including Place of Settlement.


At Trax, we are working with our clients to help them meet the challenges of forthcoming regulation, including the reduction of settlement cycles. Trax Match and Trax Match Repo can help firms efficiently manage post trade processing errors and exceptions in near real-time.  By establishing all the details that are required for efficient settlement and agreeing not just the economics but also the settlement account details, our processes help you to mitigate your risk.