While shortening the trading cycle from T+3 to T+2 and perhaps even T+1 is generally regarded as being a good aim for the investment industry, the operational changes required do not get the attention they deserve, according to Tony Freeman.
Freeman, the London-based executive director, industry relations, for Omgeo, said that the sector had been looking at risk since the global financial crisis, including operational risk. Omgeo is a joint venture between Thomson Reuters and the US Government’s DTCC, which facilitates post-trade “life-cycle events” for about 6,500 financial services firms around the world.
Europe is scheduled to introduce T+2 from January 1, 2015, but the legislation is yet to pass through the European Parliament. In the US, there are ongoing discussions about shortening the cycle, Freeman says, but no schedule as yet.
“There is less risk in a two-day settlement cycle than a three-day one,” he says.
In Australia last week, Freeman said the Australian funds management industry needed to think about how it could improve its operational efficiency.
“For instance, can you move cash on the same day? Settlement may be at 10am and if you miss that you have to wait until the next day,” he said. “In other markets they have two or three windows per day.”
Matthew Chan, the Sydney-based strategy and marketing director, said there was only mixed awareness about operational efficiency: “It’s a big issue.”
One country in the region which does have an acute awareness is Taiwan, which has a T+1 settlement cycle, which it enforces aggressively and requires pre-funding of trades through approved accounts.
“That’s probably the only way you can get to T+1,” Freeman said. “You have pre-funding on a domestic basis, with same-day cash movements. But it’s more difficult with cross-border trades. It may take two days to arrange the currency and you may need an overdraft of some other arrangement.”
Omgeo recently joined the Australian Custodian Services Association to contribute to the efficiency discussions.