Ganesh Padmanabhan & Ramakoteswara Rao T, TCS
Bringing efficiency to the entire trade lifecycle is the key to decreasing risk. With increased cross border trade activities, the post trade process continues to be complex and challenging for investment firms due to lack of harmonization in market practices. Despite technology advances and business process improvements, there are inefficiencies in the settlement process leading to trade and settlement failure.
The cost of stock borrowing to avert the risk of trade failure has increased because of the exponential increase in settlement failure. Many firms cite inaccurate settlement and account instruction (SI) data as the most significant reason for failure, followed by the deliberate failure to settle by counterparties and mismatches between cash and securities cycles. Both buy side and sell side firms are looking to mitigate counterparty and operational risks as well as to reduce costs.
Recently, the European Commission (EC) mandated reducing the settlement cycle for securities to not later than T+2 and to be implemented by 2015. This mandate by the EC is not only focused at driving market efficiency but also promises to act as an important enabler for the Target2Securities (T2S) implementation program. Countries such as India, Hong Kong, Taiwan and Germany that have transitioned to the T+2 settlement cycle have shown improvement in market efficiencies with decline in settlement failures and the associated risks.
Reducing the settlement cycle from T+3 to T+1 poses high risk and challenges to market participants due to the lack of key enablers, technology limitations and increased investments required for implementation. On the other hand, transitioning to T+2 requires lesser investment with fewer changes to the business processes by each participant.
The most important change required for transition is to mandate market participants to affirm trades on the day the trade is executed, enabling timely and accurate settlement.
Firms must look beyond short-term goals and evaluate options to re-engineer business processes and enhance IT infrastructure of the impacted business areas before transitioning to a reduced settlement cycle. They must view this as an opportunity to invest in their technology infrastructure, to achieve the end objective of decreasing risk while enhancing business efficiency.