By Jennifer Molgano
Following Europe’s lead, the U.S. and Canada have been moving from T+3 toward T+2 settlement cycles, putting the pressure on middle- and back-office operations that facilitate trade confirmation. Bob Shaw, Director of SSCNet here at SS&C Technologies, was recently featured in Fund Technology for an exclusive Q&A on the T+2 transition and the future benefits this transition offers the industry.
In terms of current progress, Shaw finds that clients are running through their normal transactions and applying the new, two-day, settlement period to those.
“We’re really at the point where people are actively testing,” reflects Shaw. “Everybody is testing their own systems or testing the certain vendors just to make sure everything is going through.”
Overall, the industry is on track with the T+2 transition. The U.S. and Canada set up committees well over a year ago helping all the moving parts to move ahead at the desired pace. Moreover, most of the key technology areas appear to be in order today. During the interview, Shaw mentioned that he hasn’t seen any red flags raised by either committee on either side of the border.
“The whole T+2 migration is really organized. Everyone seems confident that this will come together very, very well,” says Shaw.
Mitigate Operational Risk
Even though the move to T+2 is on track doesn’t mean it hasn’t been an onerous change to implement. The key reason motivating the industry to make this move is mitigating operational risk.
Operational risk has two sides. As long as you’re ready and you’ve tested with counterparties, that really mitigates the operational risk in moving to T+2.
“When you look at why we’re doing it and why so many others are, it really is about risk,” says Shaw.
Consider the three days between when you place a trade and when that settlement takes place. That’s an incredible amount of money just hanging out there—for three days. It’s sitting in the depository, but it’s still counterparty risk. If anything happens to the counterparty between time of trade and settlement, there’s a substantial risk. That’s really what the focus is, how short you can make this period between trade date and settlement date. You’re taking out risk from the system in proportion to the amount of time you shorten it by.
Bearing this sizeable risk reduction in mind, why didn’t the industry go from T+3 to T+1? Shaw notes that this would have required operational modifications along with tech modifications.
“It was felt the best way to move forward is to simply go from T+3 to T+2, then reevaluate. Take it step by step and keep moving forward,” says Shaw.
To read the full Q&A with Bob Shaw, click here.