Brian Ruane at BNY says the T+1 move has positioned U.S. markets to reduce risk and improve settlement efficiency
Brian Ruane at BNY
(In North America, the move to shorter T+1 settlement has helped BNY clients to refocus on the lifecycle of a trade in new ways as they strive for optimal clearing and settlement. So says Brian Ruane in a Q&A with FTF News. A member of BNY’s Executive Committee, Ruane is senior executive vice president and global head of clearance & collateral management, credit services, and corporate trust for BNY. As firms prepared for T+1, they reviewed the components of settlement and modernized when and where necessary. The industry is reaping the rewards from T+1: reduced counterparty risk and improved settlement in custody, securities clearance, and securities finance, he says. But there are settlement challenges and opportunities to come in European and Asian markets and via the coming expansion of the U.S. Treasury central clearing regime.)
Q: How has the T+1 transition changed the market infrastructure for North America?
A: At the end of May, the U.S. securities market moved to an accelerated settlement cycle of one day after trade, or T+1, for equities, corporate bonds, municipal bonds, unit investment trusts, and financial instruments that are comprised of these security types.
After more than three years of rigorous planning, the industry is beginning to recognize the benefits of reduced settlement risk across U.S. capital markets.
BNY, together with clients and other market participants, committed resources and investments to prepare for T+1, such as the development of new enhancements to products and producing many hours of client and internal educational content.
This was done in order to ensure that our clients, our counterparties, and BNY were ready to handle the challenges of a compressed timeline between trade, execution, and settlement.
In my view, the move to T+1 has positioned the U.S. markets to grow, to improve liquidity, and, on a risk-adjusted basis, to be among the leading markets from a settlement and liquidity perspective.
In short, investors and clients now receive the proceeds of their transactions one day earlier, resulting in a more efficient market with reduced counterparty risk and increasing capital efficiency.
While market participants are mindful of some of the operations and liquidity pressures placed on industry participants, it does appear that some benefits are beginning to be realized. However, it is still too early to fully assess the market impacts of T+1.
Q: What opportunities has T+1 created? Conversely, what kinds of challenges has T+1 created?
A: The primary benefit of the shift to T+1 is reduced counterparty risk and improved settlement in areas such as custody, securities clearance, and securities finance.
The T+1 transition has helped our clients focus on a trade’s lifecycle and what clearing and settlement are comprised of.
As an industry, in preparation for T+1, we went back to the basics to ensure that all components of settlements were considered, and updated, and modernized appropriately in order to facilitate the move to T+1. T+1 improves liquidity in the U.S. markets by improving the velocity of securities and associated cash movements.
Settlement risk improvements should lead to capital efficiency and reduced deposits and margins at financial market utilities.
On the challenges side, the change in the settlement process has initially presented some challenges for firms in different time zones from an operations, liquidity, and settlement perspective.
Q: What are your clients doing to cope with similar settlement challenges and risks to come in European and Asian markets?
A: While T+1 has been successfully implemented, the market remains vigilant from a risk management perspective.
Some industry participants have experienced increased funding costs due to the difference in settlement time between the U.S. and the E.U. In part to facilitate this, BNY has developed an intraday tri-party repo capability that will help clients bridge the potential funding gap.
This solution — the intraday tri-party repo settlement service — will allow clients to leverage our collateral platform to source funding in shorter time frames. So, in as little as one hour, clients can get all the benefits of tri-party collateral management and they can raise funding, as a result of T+1 or for other reasons.
As a result of T+1, we are seeing increased interest in our outsourced clearing services by financial institutions outside the U.S. who wish to take advantage of robust clearing solutions in accessing settlement in the U.S. equity market.
Q: What kinds of new investments and operating model improvements are needed to support shorter settlement cycles and advances in clearing?
A: Recently, the “T+1 After Action Report,” which was published by SIFMA, DTCC, and the Investment Company Institute, concluded that global market adoption of T+1 should be the focus for market participants, policymakers, and regulators prior to a fundamental reworking of securities operations that would be required in order to move to a shortened settlement cycle of T+0.
As a result of T+1, clients are certainly reviewing how they access clearing and settlement in T+1 markets. In my opinion, T+0 is still in the future.
Q: What should the industry focus on as the industry shifts to an expanded U.S. Treasury central clearing regime?
A: Change in U.S. market infrastructure continues post T+1 and the industry is now shifting its focus to the next significant market infrastructure impact, which is the implementation of the new SEC rule to expand the central clearing of U.S. Treasuries.
The U.S. Treasury central clearing mandate was announced in December 2023. Our clients are reviewing the SEC mandatory clearing rule and the central clearing access models that are offered by FICC and other CCPs.
It may seem that there is plenty of time before the mandate needs to be implemented, December 2025 for cash trades of U.S. treasuries, in June 2026 for repo trades. However, time is of the essence. Since this mandatory clearing change involves the largest and most liquid securities market in the world — the U.S. Treasury market — and the work associated with compliance with this rule may be time-consuming.
BNY is committed to supporting our clients during this transition, not only with solutions, such as our agent and sponsor clearing solutions that will allow them to meet the requirements of the central clearing mandate — but also with insights.
Our recent thought leadership paper, “Reassembly Required: Central Clearing Will Reshape the US Treasury Market,” which your readers may find useful, provides practical information and key consideration points to prepare for the change.
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