Regulation watch: Four steps to get ready for new post-trade settlements regime

The executive director of financial market infrastructure at the Bank of England has spelled out the four steps the company risk managers need to take to ensure they effectively manage the risks around the switch to a faster system for the post trade settlement of financial markets.

Speaking at the Accelerated Settlement Taskforce event hosted in London by KPMG, Sasha Mills said the move to a system will shorten the post-trade settlement process for shares and bonds, making it more efficient, resilient and shorter.

The UK market intends to move to a T+1 settlement cycle on 11 October 2027, and Mills said businesses must be ready for the date, including international businesses that operate within UK financial markets.

Companies need to make use of the time available to prepare, adapt, and test systems - and they also need to provide sufficient budget to pay for these preparations.

She said: “We along with most other countries around the world - think that shorter settlement cycles - and the automation of manual processes this will incentivise - can bring a lot of benefits, for the UK as well as the market participants, domestic and international who make use of our markets,” she explained.

“The shorter settlement cycle supports financial stability by reducing the risks faced by market participants and central counterparties, it will provide investors with quicker access to their funds, and it will free up resources for other productive uses, supporting growth.

“Firms need to help make a smooth transition to T+1 happen by preparing and testing changes to their systems and procedures, well ahead of the transition.”

“And a by-product of moving to T+1 is that post-trade processes will be made more resilient, faster, and more efficient.”

However, she cautioned that in order to achieve the reduction in risks and the freeing up of resources, firms need to help make a smooth transition to T+1 happen by preparing and testing changes to their systems and procedures, well ahead of the transition.

She explained: ”By doing this we’ll help to avoid an increase in settlement fails and disruption that would undermine the benefits and confidence in UK markets.

“We want to make sure that today’s high levels of operational resilience and low levels of settlement failure are maintained.”

Business benefits

Mills said: “I want to set the stage by confirming that the Bank, along with colleagues at the Financial Conduct Authority (FCA) and HMT, supports the UK’s move to T+1 and notes the many benefits this move should deliver to the UK and the UK financial markets which are used by UK companies and households as well as market participants around the world”.

She said that these benefits include:

• A shorter settlement cycle will mean that firms and central counterparties (or CCPs) face lower counterparty risks - leading to significant amounts of margin being released by CCPs to members and their clients,
• The amount of margin released may be on the order of £1 billion - a significant sum which could be used by market participants for other productive purposes, supporting the UK economy,
• It should reduce the costs and risks associated with the existing misalignment of settlement cycles. The UK’s settlement cycle is currently misaligned with the cycles in jurisdictions, such as the US, which have already transitioned to T+1 settlement,
• The transition to T+1 should catalyse firms’ investment in automation and standardisation, leading to lower settlement costs in the medium term and more efficient markets.

Getting transition-ready

Despite these many benefits from transitioning to T+1, there are a number of challenges which will need to be addressed.

Mills explained: “Two of these challenges are adapting to multiple time zones and standardising and automating settlement instructions.

“UK financial markets serve a host of domestic investors, issuers and intermediaries. But they also serve market participants around the globe: international participants which are located in a multiplicity of time zones.

“A shortening of the UK securities settlement cycle will mean that UK financial market participants will need to make corresponding adjustments to their processes and systems.”

This cycle shortening, unless carefully planned and executed, runs the risk of creating challenges for market participants such as investors and intermediaries which are many time zones away, she cautioned.

She said: “Unless carefully managed, there’s a risk that participants in other time zones will struggle to meet the opening hour windows for settlement instructions and related communications with settlement platforms - whether for FX or securities settlement.”

“In the weeks ahead, I encourage firms, their senior executives, and boards to prioritise this work and seek the necessary budget for system adaptations.”

Tthe implementation plan published by the Accelerated Settlement Taskforce calls for Financial Market Infrastructures (FMIs) to review all existing procedures, policies, and technology to ensure that there are no barriers to T+1 settlement.

Among the report’s highly recommended actions is a direction for FMIs to ensure that their rulebooks are amended to accurately set out the updated T+1-compatible FMI systems and processes.

Another highly recommended action is for the industry group and the UK CSD to define and publish a target rate for settlement efficiency.

Mill said: “As FMI supervisor, the Bank expects relevant FMIs to prepare for and implement necessary changes for a move to T+1, maintaining operational resilience throughout, changing their rules and systems, and facilitating preparations by their members.”

“In the weeks ahead, I encourage firms, their senior executives, and boards to prioritise this work and seek the necessary budget for system adaptations.

“And after these adaptations are implemented, firms must test and mitigate any issues arising from these adaptations and any new process flows well ahead of the transition date.”

Ultimately, she warned that FMIs and market participants need to do four things.

1. Carefully read the implementation plan
2. Produce firm-specific project plans
3. Obtain the necessary funding to execute their project plans.
4. Implement and test the changes to their systems and procedures in accordance with the timelines set out in the report.