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T+2 in Singapore: rethinking settlement on an international scale
While not confirmed, many in the industry believe T+2 will be introduced by 2016. The shift is an important one to reduce counterparty and systemic risk and is going to require a rethink of processes and greater collaboration across time zones, says Joe Nash, managing director, Asia-Pacific, at Dion Global Solutions
Joe Nash 9 Oct 2014
 
   
At the beginning of October, the Singapore exchange (SGX) said that it remains on track to move from a T+3 settlement period to T+2. While not confirmed, many in the industry believe T+2 will be introduced by 2016. The shift is an important one to reduce counterparty and systemic risk and is going to require a rethink of processes and greater collaboration across time zones.
 
What’s interesting about the Singapore initiative is that it comes amid a wave of other reforms at the Singapore exchange which are continuing to  bring it in line with international standards. These include an upgrade of post-trade technology and processes, and the introduction of minimum trading prices and new collateral rules.
 
Reducing settlement times is an important part of this drive and will put Singapore at par with many regions across the globe. In Europe, the Central Securities Depositories Regulation has mandated the introduction of T+2 across all member states by 2015 – although many will be putting it in place sooner. US participants called for similar change, prompting the Depositary Trust and Clearing Corp. to propose its own to T+2 initiative. 
 
Globally, the move to T+2 won’t happen without some major challenges along the way.  Back office processes have traditionally been a lower priority for brokers in many markets as it is viewed as an essential cost centre. The mandates now to reduce trade settlement time to T+2 will be viewed as an additional burden that brokers need to consider, despite the long term advantages. 
However, for brokers in Singapore, this may have come at an opportune time.  For many years, Singapore brokers have been reliant on a hosted IT system supplied by the SGX to support their clearing and settlement processes. With the decision of the exchange to decommission this offering, brokers are now able to implement new back-office IT solutions that enable them to streamline their operations and implement more straight through processing, therefore making the move to T+2 less painful.
 
For a successful T+2 adoption, financial institutions need to ensure trades are confirmed on the same day. For this, firms could either increase the number of their back office settlement staff and have them working for long hours; or introduce IT solutions to automate the post trade process. Simply growing headcount can pose huge operational risk, let alone cost, especially in times of high volume and volatility where manual operations cannot scale and are prone to human error. Automation of post trade processing not only helps reduce the settlement time but also diminishes the risk of human error.
 
The introduction of T+2 across the globe will also bring challenges in tackling the practicalities of international trading across multiple time zones. As the earliest markets to start the global trading day, the impact of shorter settlement cycles will impose higher pressure on local investment managers and banks in APAC. Institutional investors will be among the hardest hit as they will need to settle with custodians across various regions in a very short time frame. Everything will need to happen quickly within the settlement window, including getting approvals, confirmations and the transmission of settlement instructions.
 
Successfully tackling the T+2 challenge will be critical to Singapore’s ambitions for modernization and competing on the international stage. With India, Hong Kong, Taiwan transitioned to the T+2 settlement cycle and showing improvements in market efficiencies and a decline in settlement failures with its associated risks, there is a tremendous pressure on Singapore to reduce the trade settlement cycle in order to stay competitive and attract potential investors and new members.
 
For brokers and their clients, it means not only solving the compliance issue but also keeping pace with the evolution of the global financial markets. What’s more, all of this is essential to pave the way for the true Holy Grail – real-time settlement. This is likely to be at least five to ten years away however Singapore stands a real chance of leading the way ahead of other regions. And if it can do that, it will surely cement its position as a forward-thinking, attractive and innovative financial hub.
 
Shorter settlement periods demand technology that supports straight through processing. There are still many manual systems and processes in use across the financial markets and these present an obvious barrier however full automation is an absolute pre-requisite for T+2 and it’s up to the financial institutions, brokers, their clients and technology vendors to make it a reality.
 

Joe Nash is the managing director, Asia-Pacific, at Dion Global Solutions 

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