• Javier Hernani, Head of Securities Services at SIX


• 21.10.2022 04:15 pm
#finance

The road to hell is paved with good intentions, as the old saying goes. The road to shorter settlement times is certainly built on good intentions. The reduction in counterparty risk and minimising downsides from huge price swings between trade date and settlement would bring significant benefits.

Is the industry capable of making this change and investing enough into making this a reality? It’s a question that needs attention and has been a central theme at this year´s Sibos.

In the final days of T+3, it was obvious a removable buffer existed. As a result of the technology, which had become sophisticated enough to enable settlement in two days after trading, the industry could move to T+2 without much difficulty.

Although a shorter settlement is desirable, the move to T+1 is not being made from the same position of technological strength. The US is in a position to create the harmonisation required to make this a reality by the target date of 2024. The real challenges for settling T+1 – or shorter – will occur in Europe.

With 14 currencies, 31 central securities depositories (CSDs) and distinctive regulatory and market features in the different countries, harmonising across the continent poses many more obstacles. Regardless, the feeling at Sibos is that Europe will have to follow suit and move to T+1, in order to remain competitive and reduce friction for global market participants.

From the perspective of CSDs, the change will not be too great. Smaller changes are required to facilitate the flow of securities and monies. The role of those on the financial plumbing side is to engage with market participants in Europe to assess how we can find a balance between a reduction in counterparty risk and an increase in operational risk and costs. In Europe, this should be determined from the bottom up by the market, unlike in the US where regulators are driving the change.

Ultimately, the only way to make T+1 a reality is to invest in enhancing the current technology stack most financial institutions are operating with. If this transformation takes more than five years though, we have to ask ourselves why not invest in new blockchain technology to enable T+0 or real-time settlement?

Based on the mood at Sibos, T+1 is unlikely to be the final destination in the journey to reduce settlement times. If that is the case, we need to look at digital technology. The potential of DLT in securities services is huge. At SIX we are firm believers in its potential because of its real

applications for current industry challenges, such as shortening settlement times.

Advancements are being made in applying DLT, although it is still a future project. To make DLT work efficiently for post-trade, a number of things are needed. Firstly, investment into making digital technology compatible with what banks are using already.

From a technological perspective, a safe, reliable and regulated digital currency is required to facilitate activity on the blockchain. Nobody wants to do this with Bitcoin or Ethereum. This is where central bank digital currencies (CBDCs) will play a crucial role. The development of a digital dollar, Euro or pound will embed the mechanism for transferring securities within digital infrastructures – atomic settlement then follows. The conversation has begun at numerous central banks but if and when these digital currencies will be ready is still unknown.

It's positive to see such enthusiasm for new technology and innovation in post-trade, and for this to be taken seriously at large gatherings of the industry, such as Sibos. But we shouldn't run before we can walk. Important considerations of investment and risks are needed. Only after weighing these up and forming a European view on the path to achieving shorter settlement, can we decide on the road ahead - to T+1 or less - and the appropriate technological enhancements.