Following the 2008 financial crisis, the European Commission (EC) enacted new regulations affecting the way National Central Securities Depositories (CSDs) conduct their business. As critical institutions in the securities settlement process, CSDs perform crucial post-trade settlement as well as record-keeping of securities accounts and their transactions. While the majority of European markets utilize a securities settlement period of transaction date plus three business days known as T+3 the EC, in an effort to improve the safety and efficiency of transaction settlements and synchronize all European markets, approved the change to a transaction date plus two business days or T+2 cycle. Supporters believe that this shortened settlement cycle will mitigate risk for all participants. However, as the deadline for implementing the new cycle protocol nears, many players have doubts about the wisdom of the shift and the ability of participants outside of Europe to comply in a timely manner.
Harmonization of Settlement Cycles
In 2009, the EC convened the Harmonization of Settlement Cycles Working Group to make recommendations for the standardization of securities settlement cycles. Although a cycle of transaction date plus one day T+1 was considered, it was rejected because of the continuing use of paper documentation and low levels of straight-through processing. T+2 was approved in part because it would harmonize with foreign exchange settlement periods.
Differing Deadlines
The CSD regulation implementing T+2 is Central Securities Depositories Regulation 1, which provides for an effective date of January 1, 2015; however, notwithstanding this deadline, a number of markets chose the date of October 6, 2014, to make the switch. Critics have expressed concerns that mass switchovers on one day might cause chaos and failed trades costing millions of dollars. Soraya Belghazi, secretary general of the European Central Securities Depositories Association, said:
We are supportive of the move to T+2 and it has been under discussion for many years now. It will soon be mandated in regulation and the question has now changed from, should we do T+2 to, how are we going to implement T+2? This raises its own question as to whether or not it is a good idea to have a number of markets moving at the same time, thereby creating a big bang. Would it have been preferable to have managed the change in two or three waves?
Asian Firms Not Ready
A recent poll of Asian securities firms found that 58 percent are not prepared for the CSD change to T+2, and that one out of six firms has not even started the necessary process to switch to T+2. Even worse, the poll found that 19 percent of Asian firms were not even aware of the new pending settlement cycle regulation.
