What if the FIX electronic trading protocol gains ground in Europe as a unifying link for trade affirmations between the front and middle offices as Steve Grob, director of group strategy for the Fidessa Group, the subject of a Q&A for FTF News this week is suggesting? If he’s right, could Europe outpace the U.S. not only via a shorter settlement cycle but also with streamlined infrastructures?
The basic argument is that by extending FIX infrastructures, the buy and sell sides could affirm trades directly with each other rather than via a centralized, third-party, matching service. Streamlined affirmation, the argument continues, could ease the mandated move to shortened settlement cycles by October for European markets, and thus might help European firms avoid facing fines if they fail to meet new requirements for faster settlement.
Of course, the London-based electronic trading platform and services vendor would like lots of firms to use the Fidessa affirmation management service, dubbed AMS. This effort would also likely provide Omgeo with some new competition in Europe even though Omgeo has been pushing hard for same-day affirmation.
In addition, if FIX continues to gain significant ground in post-trade processing among European firms, it could come at the expense of SWIFT protocols and services, which dominate in Europe. Such gains could also put European firms far ahead of the U.S. on the settlement front.
Yet, for many reasons, European and U.S. firms are not making this a global issue. Given that post-trading operations such as settlement frequently cross borders, it’s troubling that the move to trading date plus two days (T+2) — one day down from the current T+3 cycle — is not being done by the U.S. and Europe simultaneously.
I suspect politics, U.S. and European regulators with major policy differences, and a growing aversion to all new regulations have contributed to the gap in T+2 forays. Given those realities, post-trade services utility DTCC has been leading a private industry T+2 push for equities, corporate and municipal bonds and unit investment trust (UIT) trades. The initiative has been joined by securities industry trade group SIFMA, JPMorgan and industry groups such as the Investment Company Institute (ICI), the Association of Global Custodians (AGC), and the Association of Institutional Investors.
But there has been pushback from some broker-dealers, particularly in the retail space, that are not quite ready and will need more time to revamp systems and workflows. Overall, firms in the U.S. may be in a rut because they have gotten a little too used to doing settlement the same way, says Tony Freeman, the London-based executive director of industry relations for post-trade systems and services provider Omgeo, in another FTF News Q&A.
Freeman also suggests that global harmonization is “is useful but it’s not the fundamental issue people focus on because there are all of the many different settlement cycles for different asset classes around the world — even within an individual market. If you look at the US, equities and corporate bonds are obviously T+3 but U.S. treasuries are on a T+1 basis.” He concludes that a harmonized, global settlement cycle “would never be achieved across the board because there are various instruments and asset classes that will always be the exceptions.”
I would still argue that a little bit of harmony at least in these early days might do a lot of good. Why couldn’t U.S. firms try to catch up and learn from their European counterparts? To bridge this gap, the DTCC appears to be doing the most it can by setting up a steering committee and working groups from U.S. market participants that will lay the groundwork for the move to T+2 and will set up the absolutely necessary deadlines.
From a practical standpoint, though, there may be years when the U.S and European settlement cycles aren’t even close to harmony. For global firms, this could mean taking on matrixes of T+2 and T+3 settlement schedules that are more complicated, inefficient and riskier than current situations.
Ironically, this would undercut the good intentions of T+2.
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