The survey finds that financial firms in the Asia Pacific region are not yet prepared to follow in Europe’s footsteps toward a shortened settlement cycle.
By and large, financial firms in the Asia Pacific region are not yet prepared to follow in Europe’s footsteps as the October 6 mandatory shortening of the settlement cycle from trade plus three days (T+3) to trade plus two days (T+2) goes into effect.
That is the gist of a study published by market research firm Celent and commissioned by post-trade services provider Omgeo, that found 58 percent of firms “are not prepared for the shorter settlement cycle” of T+2, according to a statement.
Of the post-trade executives surveyed at roughly 30 firms across the region by Celent, about one in six respondents has not started to implement the necessary process and technology changes needed to operate in a T+2 environment.
The study also shows that 19 percent of firms are not even aware of the impending T+2 switch. Underscoring preparedness concerns, 56 percent of firms said penalties for noncompliance could be a major risk, while 38 percent of firms are concerned about failed trades and increased operational costs.
“In Asia-Pacific, a shorter European settlement cycle will be particularly challenging due to operational complexities associated with time zone differences,” says Matthew Chan, head of Asia strategy at Omgeo. “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.”
The shortening of the settlement cycle in Europe is driven partly by the upcoming implementation of the Central Securities Depositories Regulation (CSDR), which has been in development since 2012 and was adopted by the European Council in June 2014, as well as Target2Securities, the new European settlement engine.
The CSDR applies to non-European firms who trade on European venues, so Asia Pacific firms who wish to continue doing business on those venues will be required to adhere to the T+2 settlement cycle.
Time zone differences within Europe “effectively mean Asia Pacific will be on a tighter post-trade schedule than locations in Europe,” according to the statement.
Other key findings in the report include:
- 73% of firms plan to change their processes to meet the T+2 requirements for Europe, while 64% indicate they will need to upgrade their post-trade technology
- 56% of firms cited penalties for non-compliance as a key risk with 38% also concerned about increased operational cost
- 67% of firms highlight investment managers as the least prepared segment for the move to T+2
“The move to a T+2 settlement cycle in Europe is an initiative of unprecedented scope which makes greater operational demands on firms,” says Neil Katkov, senior vice president for Asia at Celent, who also authored the white paper.
“Without careful preparation, firms may experience greater operational risks,” Katkov says. “While many market participants are not yet fully ready, it is encouraging to see that over 80% 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.”
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