Faster money with T+1 settlement______

Nicki Pelling, Director

Calastone has seen a ‘power surge’ in its fund transaction network, with firms showing more interest in automated settlement. What sits behind this are the shorter settlement cycle in the US –  and the likelihood that Europe will follow.

European funds and securities professionals working in settlements have so far avoided the one-day settlement cycle – known as “T+1” – adopted by the US, Canada and Mexico. The worries are that Europe’s patchwork of market infrastructures, which settles on varying timeframes, would create pressure if a shorter settlement cycle were imposed by policymakers. In the US, where there is one market infrastructure, T+1 is easier.

But it means that fund managers in the UK and EU who have US fund ranges now have to cope with the T+1 environment anyway. And even for those who do not have US fund ranges, the T+1 debate has reminded everyone that longer settlement cycles for fund subscriptions and redemptions come with greater risks and greater difficulties with controlling cashflows, says Nicki Pelling (pictured below), a director at Calastone.

Since 2008, Calastone – the global fund transaction network – has brought worldwide automation to mutual fund trading. Calastone has strongly advocated that greater levels of automation within fund settlements would be a huge step forward for the industry, and the move toward T+1 is possibly the regulatory stick necessary to force action. This automated settlement solution is seeing greater interest now against the backdrop of the move toward T+1, Pelling says.

“By moving to net settlement, the funds industry has the opportunity to cut significant costs from their operating models as well as reduce liquidity and counterparty risk, compared with paying gross subscriptions and receiving gross redemptions to multiple parties,” she says.

No more calls to the bank

Importantly, the solution brings greater visibility about where a fund is in the settlement process. For end investors, this better visibility of the arrival time of money into their accounts gives them a better readiness to deploy cash for other investments.

“The lack of transparency in the cycle means fund managers might have to work out payment references and make phone calls to the bank to see where the money is. This is a complex task if carried out manually. But with more automation there is more visibility about when you’ll get paid,” says Pelling.

Late settlement, in part due to the heavily manual nature of the work, happens frequently. This can trigger a chain reaction, says Pelling. Where a firm needs money in but doesn’t get it, the firm cannot pay money out. Put simply, a fund cannot balance its books.

“This is why we’ve focused more on the net settlement solution recently. So, if you owe 500 and the counterparty owes you 400, you just have to make a 100 payment to them to reconcile the order. You’ve effectively kept the 400, which you can use to reconcile other redemptions.”

Calastone’s settlement solution – which can support trade-by-trade, gross or net settlement, depending on a counterparty’s capabilities – is global, multi-bank and multi-currency. In the UK, Calastone sees 85% of fund distribution trading flow, and this “network power” brings a vast opportunity for quicker settlement with fewer fails – known as “exceptions” – which can be expensive for firms to put right.

The advantage of shorter settlement cycles, such as that now seen in the US, include enhanced liquidity and reduced exposure to volatility, says Pelling, and therefore should be seen as an opportunity to improve settlements in Europe rather than an operational inconvenience. With an automated settlement solution, meeting shortened settlement timeframes is easy, she feels.

The European Fund and Asset Management Association (EFAMA) is supportive of T+1. In a 15 December 2023 response to consultation from the European Securities and Markets Authority, the trade association said it found a “compelling case” for the EU to commit to a “timely” transition to T+1.

EFAMA also warned that fund managers will face important costs with the current “misaligned environment” that will lead to performance losses for investors.

Although EFAMA said there were equally strong arguments to question the move to T+1 in Europe, the trade body also said that there is “a major and serious risk” if other financial centres followed the US while Europe did not.

“European capital markets would be behind their peers in terms of capital efficiency and risk management. Our institutions would rely on older technology and more manual-driven processes while most other advanced economies would have migrated to greater and greater levels of STP and automation.”

Coming to a stock exchange near you

According to Pelling, one of the largest fund managers with a US range has adopted the Calastone solution in order to initially automate the settlement process for its US fund suite.

Similarly, asset managers making investments through euro, sterling and dollar funds are automating their settlements in order to manage the risks of differing settlement timelines internationally.

Pelling says: “T+1 is not going to stay in the US. It is expected that the UK and EU will also move to it. Even though trading is very automated, what happens afterwards is not. We don’t have the central clearing model the US has. But T+1 will come to a stock market near you – and quite soon!”

She adds: “People will need to stop extracting data from spreadsheets – which is what is often done at the moment in post-trade processes. T+1 will force firms to automate settlement. They’ll need to this to squeeze settlement into a day or even half a day.

“This is a good thing. It means that money moves faster. No longer would you have to wait two or three days for the cash from a redemption to arrive and not be able to make the purchases you wanted.

“The faster that money moves, the more efficient the market will be.”

(First published in Funds Europe June 2024:

Featured articles