Accelerated Settlement: A Challenge and an Opportunity for UK Market Participants
As the US will soon move to a faster T+1 settlement cycle in May, the UK has also been contemplating the switch; with the UK Treasury having established a taskforce “UK Accelerated Settlement Taskforce” (AST) to consider a T+1 settlement at its market.
With the US adopting T+1 imminently, it’s important to understand potential real-term impacts. To illustrate how this might impact clients who currently employ a portfolio switch strategy to finance the purchase of a security through the sale of another security, please see below:
Currently
- Client SELLS £10k of UK stock (Settlement T+2)
- Client BUYS £10k (equivalent in USD) same day of US stock (settlement T+2)
- In this case the settlement of the two trades occurs on the same day and no cash debit shows on account.
Post US adopting T+1 (28th May 2024)
- Client SELLS £10k of UK stock (Settlement T+2)
- Client BUYS £10k (equivalent in USD) same day of US stock (settlement T+1)
- In this case the purchase of US stock would need to have funding in USD in place on T+1.
- This can be done either by having USD settled cash on the client account or exchanging another currency to cover the total value of the purchase and remember to indicate on the FX instruction “USD for T+1”.
When is the UK likely to adopt T+1?
“A date before the end of 2027 allows time for the new systems adopted in 2025 to bed in while taking a pragmatic approach that allows the UK to adapt to global developments.
The specific date should be confirmed by the Technical Group when it reports by the end of 2024.”
Extract: Accelerated Settlement Taskforce Report March 2024 https://assets.publishing.service.gov.uk/media/6603f31bc34a860011be762c/Accelerated_Settlement_Taskforce_Report.pdf
In addition to outlining a proposed timeframe for the UK to adopt T+1, the report also recommended the creation of a “Technical Group” to look at operational issues that will need to be resolved and to help agree on market standards to ensure a smooth transition.
Further detail, and potentially a date for when the UK should transition to T+1 is expected to be released by the Technical Group in its scheduled report at the end of 2024.
The AST March 2024 report goes on to outline 5 main phases that the UK adoption of T+1 would comprise, namely:
The 5 Main Phases of the UK Adoption of T+1
Required regulatory and rule changes
Adaptations to the existing legal frameworks and industry standards that govern the settlement process in the UK. These changes would need to address the operational, technical, and business consequences of moving to a shorter settlement cycle, such as the impact on liquidity, risk management, clearing, and reporting.
Industry engagement
The consultation and collaboration between the regulators, market participants, and service providers involved in the settlement process.
Testing
The process of verifying that the systems and processes involved in the settlement cycle are functioning correctly and can handle the changes required by the shorter timeframe. Testing involves both internal testing by each entity and external testing with other entities and regulators.
Transition
Ensuring that the necessary operational, technological, legal, and regulatory changes are made by each entity to support the shorter settlement cycle within the defined timeframe.
Alongside the identification of these 5 main phases, the AST report detailed an indicative timeframe for implementation milestones:
Proposed UK T+1 Industry Implementation activities/milestones
Adapted from the US Implementation playbook activities.
Planning and implementation considerations
“US market participants have estimated that moving from T+2 to T+1 involves a reduction in available time for key activities not of 50% as might be assumed, but of 83%, as activities which would be performed on the intervening ‘middle day’ need to be performed on Trade Date and potentially after market close.”
Extract: Accelerated Settlement Taskforce Report March 2024 https://assets.publishing.service.gov.uk/media/6603f31bc34a860011be762c/Accelerated_Settlement_Taskforce_Report.pdf
Moving to T+1 will require UK market participants to achieve a significant step change in process and operational efficiency, a priority we are dedicated to helping our clients pursue at GPP and a topic we will explore in greater detail in future articles.
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Source of data: Accelerated Settlement Taskforce Report March 2024 https://assets.publishing.service.gov.uk/media/6603f31bc34a860011be762c/Accelerated_Settlement_Taskforce_Report.pdf
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