SWIFT INSTITUTE
WORKING PAPER

INDUSTRY PREPAREDNESS FOR ACCELERATED SETTLEMENTANTHONY GANDYDANIEL BROBYGARY WRIGHTTONY FREEMANMARK DURKIN

PUBLICATION DATE: 30 MAY 2023

The views and opinions expressed in this paper are those of the authors. SWIFT and theSWIFT Institute have not made any editorial review of this paper, therefore the views andopinions do not necessarily reflect those of either SWIFT or the SWIFT Institute.

1Industry preparedness for accelerated settlement
Anthony Gandya , Daniel Brobyb , Gary Wrightc , Tony Freemand , Mark Durkine
a Visiting Professor, London Institute of Banking and Finance,b Professor, Ulster University Business School,c Director, ISITC Europe CIC ,d Director, ISITC Europe CIC ,e Professor, Ulster University Business School,

Abstract
This paper discusses the progress made towards T+1 and instantaneous settlement in financial markets, and industry preparedness
for such a change. We cover the various equity settlement technologies and analyse how collateral, stock lending and margin
requirements can impact the settlement processes. The debate on shortening the equity settlement cycle is discussed, along withpotential policy recommendations based on industry preparedness. The paper draws on 44 unstructured interviews and two focus
group workshops with key stakeholders in the financial industry. This sample represents firms with total assets in the tens oftrillions. The paper provides a comprehensive overview of the issues surrounding accelerated settlement and offers insights forindustry practitioners. It was clear from our research that there is a perceived trade-off between the benefits of improving market
efficiency and infrastructure and the increased risk of settlement failure. As our interviews were focused on those with settlement
and operations functions, the tone of the responses was biased towards the latter. The findings of this study will help stakeholders
identify gaps in their current settlement processes and develop strategies to meet the demands of accelerated settlement.
Keywords: , Settlement cycle, T+1, SwiftContents
1

Introduction

2

2

Literature

4

3

Settlement protocols
3.1 Settlement worked example . . . . . . . . . . .
3.1.1 In a T+2 trade: . . . . . . . . . . . . .
3.1.2 In an atomic trade: . . . . . . . . . . .

4
4
4
5

Settlement processes, technologies and ways toachieve operational efficiencies
4.1 Delivery versus Payment (DVP) . . . . . . . .
4.2 Continuous Linked Settlement (CLS) . . . . .
4.3 Central Counter-party Clearing (CCP) . . . . .
4.4 Automated Clearing House (ACH) . . . . . . .
4.5 Straight Through Processing (STP) . . . . . . .
4.6 Distributed ledgers (DL) . . . . . . . . . . . .

5
5
5
5
5
5
6

5

Factors affecting industry preparedness

6

6

Settlement failures
6.0.1 Delays in trade confirmation: . . . . . .
6.0.2 Errors in trade matching . . . . . . . .
6.0.3 Custodial errors . . . . . . . . . . . . .
6.0.4 Operational errors . . . . . . . . . . .
6.0.5 Insufficient funds/securities . . . . . .
6.1 Mitigations . . . . . . . . . . . . . . . . . . .

6
6
6
6
6
7
7

4

7

Challenges to industry preparedness
7.1 Margin and collateral . . . . . . . . . . . . . .
7.2 Prefunding . . . . . . . . . . . . . . . . . . . .
7.3 Reducing the paper trail . . . . . . . . . . . . .

7
8
8
9

8

Methodology

9

9Results and discussion
9.1 Information and Technology . . . . . . . . . .
9.2 North American timetable . . . . . . . . . . .
9.3 Timezones . . . . . . . . . . . . . . . . . . . .
9.4 Foreign exchange, pre-funding and operationalcosts . . . . . . . . . . . . . . . . . . . . . . .
9.5 Risk . . . . . . . . . . . . . . . . . . . . . . .

11
11
12
13

10 Conclusion

14
15
16

1. Introduction
This paper investigates industry preparedness for shorter equity settlement cycles. Since 2018 the US’s Depository Trust &Clearing Corporation (DTCC) has been exploring the benefitsof accelerating the US and Canadian equity settlements system(Abel (2022)). In 2021 the DTCC published a white paper calling for the US securities industry to come together and explore
shortening the North American equity settlement process fromthe current two-day to a one-day cycle DTCC (2023).
The tempo of change towards accelerated settlement in the
US has increased. In February 2023, the Securities ExchangeCommission (SEC) published its rules for one-day settlement tobe the standard settlement cycle for equities by May 2024 SEC(2023). This followed a series of short squeezes and market disruption events. These were the results of collusion by amateur
traders to disrupt short sellers (eg Gamestop and Robinhood).
Institutional market participants blamed slow settlement cycles
for the difficulties they experienced.1
The adoption of one-day settlement (T+1) in North America is the most significant global move towards an accelerated
settlement cycle. It impacts all participants in the trading cycle
and requires custodians to be ready with robust systems. The
US represents the primary non-domestic investment location
for the world’s savers, investors, pension funds and investment
firms, to such a degree that by one calculation, international
ownership of US equities, combining both portfolio and direct
investments, now represents 40% of US corporate value. Importantly for this paper, half of this overseas ownership of US
shares, was through portfolio investment. The Federal Reserve
noting that in 2021 foreign purchases of US stocks amounted to$30.615 trillion while selling $30.567 (Federal Reserve April
2022). The US represents 46.2% of the global equity market.
Therefore, how the US and Canada structure their markets matter to the rest of the world and North America’s move to accelerated settlements during 2023 and 2024 has wide-ranging
consequences across the globe.
In the past, paper intensive systems and manual processing meant that settlement periods of up to T+10 were not that
uncommon, technological enhancements and innovation at thecustody level. This has made reducing settlement times a possibility. These enhancements have facilitated reduced risk, margin and capital throughout the settlement chain. We note, however, that recording change of ownership at a securities registrar
remains a slow part of the post settlement process. Likewise,
as detailed later, our interviews show that timeliness can also
be impacted by human factors, especially where manual paper
processes persist.
The progression to T+1 settlement in financial markets, as
depicted in the timeline below, has been driven by several factors. One of the primary reasons for the shift is the reduction inrisk exposures. A shorter settlement period means that market
participants are exposed to the counter-party risk for a shorter
duration, reducing the chance of default and consequential settlement failure. This reduction in risk leads to a reduced needfor margin in the settlement system and therefore lower capitalrequirements for brokers and custodians.
June 1995 5 + 3 day rolling settlement
Jan 2001 IOSCO call for accelerated settlement
Oct 2014 Europe migrates to T+2
Sept 2017 US and Canada migrate to T+2
Dec 2021 SIFMA, ICI and DTCC paper on T+1
Feb 2021 India begins migrating to T+1
Feb 2023 US and Canada announce timeline to T+1
May 2024 US and Canada T+1 proposed implementation

The debate on the move to accelerated settlement is important because settlement failure has direct consequences for theparties directly involved. Indeed, systemic failure could lead togridlock. That would impact liquidity and smooth functioningof financial markets.
When initially arguing the case for moving US equity markets from T+2 to T+1, the DTCC argued that the reduction in
the volatility element of central counter-party clearing margin
requirements would be 41%, itself representing 60% of overallmargin requirements (DTCC (2021)). Additionally, a shorter
settlement period can lead to increased liquidity in the market,
as investors can quickly reinvest the funds received from sellingsecurities.
However, as we found in our interviews, there are potential
drawbacks to accelerating settlement cycles. Not least of whichis the increased operational burden on market participants. Increasingly participants are having to execute sometimes quite
complex instructions in a very short time period. With a shorter
settlement period, there is less time to complete the necessary
paperwork and processes to settle a trade, and this can be challenging for some market participants. This is particularly thecase for smaller firms.
There is also a risk of increased errors in settlement as the settlement cycle shortens, which can lead to delays and additionalcosts. This challenge is even greater for firms in mismatched
time zones where time sensitive settlement activities could takeplace into the early hours of the morning. In such instances,
there is no flexibility to delay these functions until normal office hours as the slot for that activity (for example matching andaffirmations of trade) will be closed.
The North American region are not the only regimes whichhave or are moving to an accelerated settlement environment.
The Indian market began the transition to T+1 in February2022, the phased approach began with the smallest 100 stocks
of its 5200 listed stocks and finished with the transition of thelargest 500 in January 2023. This was a deliberate process
choice based on the concept that only the top 500 shares weretraded on international markets and bought by non-domestic
customers (Krishman (2015)). Mainland China currently operates a T+0 settlement cycle for large entity “A” shares whilestill operating a T+1 cycles for cash (Paribas (2021)).
Our fundamental research questions are:
1. What are the general attitude to accelerated settlement
across buy-side and custodial institutions?
2. How well prepared are global wealth and fund management institutions and global custodians for accelerated securities settlement?
3. What are the post implementation challenges and changes
facing international investors in the context of accelerated
settlement in the largest international investment market,
North America?
In summary, the progression to accelerated settlement in financial markets has been driven by several factors, including
the reduction of risk and technological advancements. While
T+2 settlement is currently the industry standard in many financial markets, T+1 and even T+0 are likely to continue to

1 Fox, M., 9/2/2022. The SEC consequently decided to overhaul the controversial trade-settlement rule at the centre of the issues. Business Insider

33. Settlement protocols

displace the older settlement cycle structures, with the globally
important North American market setting the pace (Burns et al.
(2017)). We now investigate whether industry is prepared forthis to become the operational norm.

The equity settlement process refers to the transfer of ownership of securities from a seller to a buyer. It is depicted infigure 1 with a worked example in the insert. In the past, thesettlement process took several days to complete. The process
is commonly referred to from the trade day, namely T+1 for
one day, T+3 for three days and T+5 for five days. This meansthat the buyer received the securities on day one, day three, or
day five (after the transaction date). T+1 is fast becoming theindustry standard and/or target.
The key difference between a T+1 trade and an atomic tradeis the settlement period (Lee et al. (2022). In the former, thereis the aforementioned one day between the trade date and thesettlement date, whereas in the later, the transfer of ownershipand payment occurs immediately.
The advantage of an atomic trade is the total elimination ofcounterparty risk (Bech et al. (2020)). Its simultaneous naturemeans there is a very low likelihood of settlement failure or
default. However, atomic trades require a payment provider,such as a central counter-party (CCP), to facilitate the transfer.
Although common in the futures markets, as CCP may not be
available for all types of securities or financial markets, especially cross border. As a result, counterparty trades are more
widely used. They do not require a payment provider. As aresult, such trades carry more specific counterparty risk and require a longer settlement period (Mills Jr and Nesmith (2008).

2. Literature
From an academic point of view, the literature on accelerated
equity settlement encompasses several key themes, including
market efficiency and market stability. Supporting this is theliterature on the economies of scale that the settlement industry
enjoys (Schmiedel et al. (2006)). That said, a settlement institution is treated the same as any other multi-product firm that
incurs operating costs based on its inputs and outputs (Gehrig(1998)).
One of the central concepts is market efficiency, which refers
to the extent to which security prices fully reflect all available
information. Accelerated settlement has the potential to enhance market efficiency by reducing the time between trade execution and settlement, which can lead to faster dissemination of
information and quicker price adjustments. This, in turn, may
result in improved price discovery and more accurate valuationsof securities, benefiting investors and market participants. Lin
and Chen (2019) hypothesize that with accelerated settlement(in the derivatives market), price manipulation is prevented but
only at the expense of market quality.
Another key theme in the literature is that of financial stability. Settlement failures, delays, or disruptions can have adverse
consequences for the stability of financial markets and institutions. Asmar and Trimbath (2022) investigated failed trades andshowed that regulatory improvements in the settlement process
reduced these. There is also scholarly concern on the risks ofconcentrated central clearing Mills Jr and Nesmith (2008).
Accelerated settlement is therefore seen as a way to reduce
settlement risks, such as counterparty credit risk, liquidity risk,
and operational risk. The argument is that it minimizes the time
window for such risks to materialize (Karpoff (2021)). Thatsaid, the authors caution that should fraud arise, there is alsoless time in which to detect and mitigate the impact.
The literature on accelerated equity settlement also explores
various other dimensions, such as the impact on market liquidity, transaction costs, operational processes, and risk management practices. For example, faster settlement may impact market liquidity by altering the availability and utilization of collateral, affecting market participants’ funding andfinancing strategies. Walley (2023), meanwhile, argues thatembracing accelerated settlement is an opportunity to modernize the settlement process. It may also influence transaction
costs, including settlement fees, and positively impact operational processes related to trade confirmation, affirmation, andsettlement instructions. Moreover, it may require adjustments
to risk management practices, including credit risk assessments,
collateral management, and settlement risk monitoring.Knieps(2006) highlights that there is a competitive market in settlement approaches, as highlighted previously.

3.1. Settlement worked example
We now produce two examples, a T+2 trade and an atomic
trade. In both scenarios, there is a linear process where any
failure in any stage leads to a fail of the whole process. Assume
that Buyer A wants to purchase 100 shares of XYZ stock from
Seller B at a price of 50p per share.
3.1.1. In a T+2 trade:
On Day 1 (trade date), Buyer A and Seller B agree to theterms of the trade.
On Day 2, Buyer A’s and Seller B’s custodians send settlement instructions to the Central Securities Depository formatching.
On Day 2, Once the seller B’s custodians has sent its settlement instruction to the CSD, it will wait for the settlement
matching results. If it matches, nothing will be done and thetrade will settle on the agreed settlement date. If there is a mistmatch, the seller’s custodian will work either directly with thebuyer’s custodian or will tell the seller what the miss match isso he can contact the buyer and agree on new terms that will
eventually match.
On Day 2, The matching or miss match will be handled asabove. The payment will be done by the CSD on settlement
date. The buyer’s custodian needs to have enough cash posted
on his account at the CSD (or at the bank where the CSD has apower of attorney with) in order to settle the trade. .
In this scenario, the settlement process takes two days after
the trade date (T+2) for the transfer of ownership and payment
to be completed.
43.1.2. In an atomic trade:
On Day 1 (trade date), Buyer A and Seller B agree to theterms of the trade.
At the same time, a payment provider, such as a central
counter-party (CCP), receives the trade details and executes
a simultaneous transfer of ownership and payment between
Buyer A and Seller B.
In this scenario, the transfer of ownership and payment occurs immediately, and the settlement is completed in real-time.

4.1. Delivery versus Payment (DVP)
This technology ensures that securities are delivered only
when payment is made and vice versa (Patrikis (1997)). It reduces the risk of settlement failure by ensuring that securities
and payment are exchanged simultaneously.
Increasingly, DVP is a three-step process. A sale is reconciled against the seller’s securities account balance and is then,if given a go ahead, routed to the trading book. Upon trade
execution, securities are flagged with “pending out settlement”
status. These flagged securities are effectively blocked in theseller’s account so they cannot be sold twice.

Trade Execution T+0

4.2. Continuous Linked Settlement (CLS)This technology is used for foreign exchange transactions
Ledrut (2007). It helps eliminate settlement risk by ensuringthat payment and currency exchange occur simultaneously. It
operates on a real-time gross settlement basis, which means thateach payment is settled individually.
The CLS payment system eliminates much of the counterparty settlement risk. That said, the risk is actually transferred
to one of two companies, CLS Bank International, a New Yorkbased bank authorised under the Edge Act), and CLS Services.
Kahn et al. (2003), however, points out that net settlement ismore optimal than gross settlement, even taking account of thecredit risk of the central counter-party.

Trade confirmation

Trade Matching

Invalid

Settlement instruction generation
Settlement instruction validation
Valid - (Delivery against payment)

4.3. Central Counter-party Clearing (CCP)
This technology facilitates third-party inter-mediation between the buyer and seller. This ensures that trades are settled
even if one party defaults (Kroszner (2006). It reduces counterparty risk and enhances market stability.
A CCP combines the exposures of all open trades on its balance sheet. If its clearing members can meet their obligations,these are matched. If a counter-party defaults, it assumes therights and obligations of the failed clearing participant (BIS(2015))

Settlement status update

End of Settlement
Figure 1: Equity Settlement Flowchart

The connectivity of database remains one of the challenges.
Financial markets are built on multiple databases, many ofwhich find it difficult to communicate with each other. Priem(2020) suggest the adoption of DL technology can help address
this, although of course all participants would have to do this.

4.4. Automated Clearing House (ACH)This technology is used for electronic fund transfers betweenbank accounts (McAndrews et al. (1994)). It can help to reduce
settlement time and costs, increase efficiency, and reduce errors.
ACH transactions typically involve batch processing and are
not designed for real-time or immediate settlement.

4. Settlement processes, technologies and ways to achieve
operational efficiencies

4.5. Straight Through Processing (STP)

There are several equity settlement processes and technologies that are currently in use, or being developed, by the financial sector (Panourgias (2015)). Each of these technologies has
its own advantages and disadvantages and indeed, these technologies may be used in combination. The choice of technology by a counterparty depends on various factors such as thesize and complexity of the transaction, the desired speed of the
trade, the parties involved, and regulatory requirements.
It goes without saying that both counter-parties should be using the same technology. Some of the most common ones include:

STP is a fully automated process for settlement, from trade
execution to settlement (Hee et al. (2003)). It eliminates theneed for manual intervention and can help to reduce settlement
time and costs, increase efficiency, and reduce errors, no matterthe fundamental structure of the settlement process.
STP replaces paper-based processes with electronic data exchange and automated workflows. This eliminates the need forphysical documentation and hence paper checks or faxed instructions. As a result, there are less errors and omissions thanthe use of the later.
5Regulatory compliance issues can arise if the parties involvedin the settlement process fail to comply with the relevant regulatory requirements (Iglesias-Rodrı́guez (2012)). This can resultin fines, penalties, or legal action against the parties involved.
Further, different legal jurisdictions often have different settlement protocols. For example, some countries impose foreign
ownership caps, and the settlement process has to ensure checks
on compliance.

4.6. Distributed ledgers (DL)This technology results in a shift in digital records of transactions, distributed across a network of computers, rather thanbeing stored in a centralized location. They are increasingly be
used in securities settlement despite only gaining in popularity
in the last fifteen years (Pinna and Ruttenberg (2016)) DLs aredesigned to be transparent, secure, and tamper-proof, making
them well-suited for recording and tracking financial transactions. Distributed ledger technology is built using blockchains.
DLs can facilitate atomic settlement, making them the preferredtechnology for simultaneous settlement. Using DL, transfer ofownership and payment can be completed in real-time, without
the need for intermediaries or clearinghouses.
In a DL-based atomic settlement, the trade details arerecorded on the distributed ledger, and the ownership of theasset is transferred to the buyer simultaneously with the payment being transferred to the seller (Lee et al. (2022)). The DL
ensures that the trade is transparent, secure, and irreversible,
eliminating the risk of settlement failure or default. DLs alsoenable the automation of settlement processes, reducing thetime and costs associated with manual processes. Smart contracts, which are self-executing contracts with the terms of theagreement written directly into code, can be used to automate
the settlement process and ensure that the transfer of ownership and payment occurs automatically and simultaneously, assuming that all participants use the same DL or interoperable
ledges..
Overall, distributed ledgers can facilitate atomic settlement
by providing a secure, transparent, and tamper-proof record oftransactions that enables the simultaneous transfer of ownershipand payment. DL based settlement processes can improve efficiency, reduce costs, and eliminate counter-party risk, making
them an attractive option for financial market participants.

6. Settlement failures
Settlement failures occur when either the buyer or seller fails
to deliver the securities or payment on the settlement date (Boni(2006)). Settlement failures can occur due to errors in trade
matching, processing delays, insufficient funds or deliverable
securities. This represents the biggest concern in any move toaccelerate settlement practice.
There are several the key points in the settlement process
where failures are most likely to occur (Milne (2007). These
include trade matching, payment processing, foreign exchange,
and custody. One of the biggest issues, which impacts all global
markets and settlement systems, is the different time zones thatmarkets operate under Freund (1989)).
The potential impact of settlement failures on market participants can result in not only the risk to the capital in the trade,but also to regulatory censure and a fine. Potentially, even thecompany could be at risk if the capital of the trade come close
to or exceeds the capital on its balance sheet. As a result, withlarge failures, there is also the potential for systemic risk.
6.0.1. Delays in trade confirmation:
Delays in trade confirmation can occur if the parties involvedin the trade fail to confirm the details of the trade in a timely
manner (DeGennaro (1989)). Delays in trade confirmation cancause delays in settlement, which can increase the risk of settlement failures.

5. Factors affecting industry preparedness
We now discuss the steps that can be taken by market participants to prepare for accelerated settlement and the factors that
impact their preparedness. These include investing in new technology infrastructure, improving risk management processes,
and enhancing regulatory compliance. These should be understood in the context of the industry pressures to improve services and reduce costs (Exchange and House (2000)). These
factors form the basis of our interview, which we expand on insection 7.
The key factors that affect industry preparedness are regulatory environment, market structure, corporate and technologicalreadiness (Webster and Gardner (2019)). Corporate readiness is
influenced by human factors, hence the need for our interviews.
Further, the technology and regulatory environment shape theinternal controls and procedures. Similarly, the overall market
structure defines the nature of the counter-parties. The connectivity of database remains one of the challenges. Financial
markets are built on multiple databases, many of which find it
difficult to communicate with each other. Priem (2020) suggest
the adoption of DL technology can help address this, althoughof course all participants would have to do this.

6.0.2. Errors in trade matching
Errors in trade matching can occur if the details of the trade
do not match between the buyer and seller. This can result in delays or failures in settlement and therefore impact cost (Bessembinder (1997)).
6.0.3. Custodial errors
Custodial errors can occur when the custodian of the securities or funds makes an error in the settlement process (Chanet al. (2007)). This can lead to delays or failures in settlement
and can cause financial losses for the parties involved.
6.0.4. Operational errors
Operational errors can occur due to a variety of reasons,such as system failures, human errors, or cyber-attacks (Broby(2010)). Operational errors can cause delays, errors, or failuresin settlement, and can result in financial losses for the parties
involved.
6efficiency. Shorter settlement times can reduce counterparty
risk by minimizing the exposure that buyers and sellers have toeach other in the time between trade execution and settlement.
This can also reduce the need for collateral and margin requirements, which can lower costs and increase liquidity. Additionally, shorter settlement cycles can improve market efficiency byallowing investors to deploy capital more quickly and reduce
the time that their funds are tied up in trades.
However, opponents of shortening the settlement cycle argue
that it can increase costs and operational risks (AFME (2022b).
Shortening the settlement cycle may require significant investment in technology and infrastructure by market participants.
Additionally, some market participants may struggle to adapt to
the new settlement cycle, leading to increased operational risks
and potential disruptions in the market. This may also increase
the risk of settlement failures and market-wide disruptions.
The Association for Financial Markets in Europe (AFME)
have estimated that the real reduction in time available to settlement trades in a T+1 environment vs a T+2 environment ismuch more dramatic than it appears to be and in realty reduces
the settlement operations window by 83%. “In a T+1 environment settlements teams only having 2 core business hours
between the end of the trading window and the start of the settlement window, compared to 12 core business hours in a T+2
environment” (AFME (2022a)). In a T+2 environment many
trades are using overnight batch processes as there is a day
available to process trades after the initial deal is struck. This is
not the case in T+1 environment. This is because T+1 requires
an accelerated affirmation process confirming trades and thenrapid movement into the settlement process itself.
This time challenge is exacerbated by time zone challenges
where in the case of cross-border securities transactions thechain is complex and has a long series of intermediaries. Indeed, in such cross-border activity, . Indeed, the role of precision timing recording of each stage of the trading cycle becomes more pertinent (Broby et al. (2019)). The North America T+1 settlement cycle will require trade affirmation (matchedand confirmed as correct and ready for settlement) by 9pm Eastern Time to prepare for the settlement process (DTCC (2023)).
The challenge for non-domestic investors into the US is in largepart to do with this timing. For example, 9pm Eastern Timeequates to 3am in Frankfurt, any exceptions which occur will
be difficult to solve as, while it may be possible to establish anight shift for settlement staff, any exceptions which may need
to be discussed with say a fund manager who initiated a trade,will be very difficult to resolve at that time of the morning.
There is also a debate around the appropriate length of thesettlement cycle. While some argue for a T+1 settlement cycle,
which would settle trades one day after the trade date, otherssuggest that even shorter cycles, such as T+0 or same-day settlement, may be possible with the use of new settlement technologies like blockchain and distributed ledger technology.
Shortening the equity settlement cycle has the potential to increase efficiency and reduce risk, but it also comes with potential costs and operational risks. As the financial industry continues to evolve and new settlement technologies emerge, it islikely that the debate around the appropriate settlement cycle

6.0.5. Insufficient funds/securities
Failure to get the required funds or securities in place forfinal settlement will cause a trade to f ail. This can occur whena a buy is made requiring funds to be made available from asell order but which itself does not complete, or a sell order has
been placed, but the security itself is not in place, for example
it has been loaned out and has not yet been recovered.
6.1. Mitigations
Trade failure can be mitigated by:• Improving transparency and collaborating with other organizations so as to adapt to new threats and challenges as
they arise.
• Leveraging emerging technologies such as blockchain, artificial intelligence, and machine learning.
• Developing more secure, resilient, and efficient messaging
services.
• Improving the data exchange protocol and methodology.
• Removing or reducing reliance on paper-based systems,
including physical stock certificates.
• Removing or reducing reliance on signature-based authorization.
• Addressing the need for physical documents for regulatorycompliance.
• Improving liquidity management and use of tools such as
stock borrowing to ease funding and stock short falls.
In summary, the equity settlement process is a complex process involving multiple parties, systems, and processes. Eachone of these interlinked part of the chain can increase the riskof errors, delays, or failures. It is therefore important for market participants to have robust processes and systems in place tomitigate these risks and ensure timely and accurate settlement,
especially if shortening the settlement cycle. This is because
in that scenario there is less time to correct anything that goes
wrong.
7. Challenges to industry preparedness
It would be wrong to suggest that the settlement industry has
not had time to prepare. The various securities settlement systems that exist are based on both international initiatives andindustry requirements developed over decades. For example,
the criteria developed in 2008, a four-level system to ensure securities markets effectiveness (De Visscher et al. (2008)). These
give guidance for the operation and supervision of netting systems. The Bank for International Settlements (BIS), as wellas the DTCC have also published various reports on securities
settlement systems (BIS (2015), DTCC (2021), DTCC (2023)).
Advocates of shortening the settlement cycle, such asThomadakis (2022), argue that it can reduce risk and increase7

length will continue.
Identify the challenges that market participants may facein achieving industry preparedness, such as cost and resource
constraints, technology implementation challenges, and lack ofstandardization. Discuss potential solutions to these challenges,
such as collaboration among market participants and regulatory
authorities, and the adoption of industry-wide standards.

Where:
α: The annual foreign investment into the US.
θ: The cost of FX transaction, represented as a percentage.
ν: The number of transactions that would require an accompanying FX transaction.
Spread at T+1: The spread (difference between bid and ask
prices) in the FX market for a currency pair at the T+1 settlement cycle.
Spread at T+2: The spread in the FX market for the same
currency pair at the T+2 settlement cycle.
Pre-funding arrangements need to be made in advance ofany settlement to ensure that the necessary funds are available
when the settlement obligations arise. This requires timely coordination and communication among the involved parties, including investors, brokerage firms, custodian banks, clearing
houses, and settlement agents. With shorter settlement cycles,
pre-funding arrangements must have to accommodate the compressed timeline. Proper coordination, communication, and adherence to cut-off times, deadlines, and operational processes
are essential.
While some issues can be engineered out, at a price, challenges such as foreign exchange and the potential cost of prefunding (or the costs of deciding not to pre-fund and have periods out of the market often imposed on their customers), cannot be readily engineered out of the business. The challengesof time zone also prevail. The benefits of reduced broker andcustodial costs in terms of lower margins, counterparty risk
and capital could only percolate down through competition andsuch a process was not one which wealth and fund managers
expected to happen.
How non-domestic buy-side firms manage the challenge isstill unclear. European concerns are that some operations andeven some trading activity will move to the US or Canada giventhat wealth and fund managers cannot simply ignore the US
market. One German fund organisation noted that the industry in Germany has larger investments in US equities than inGerman equities. The concertation of “growth” stocks, such astechnology firms, in the US means it cannot be simply excluded
as a destination for funds simply because it is more expensive
to operate there. Such a migration of activity to the US would
not be popular among European politicians and would create
strange split where customer funds would be covered by one
set of regulators and the consequential trading covered by another regulatory regime.
One option for accelerated settlement regimes which wish
to encourage international portfolio investment is to offer someflexibility to international investors when accessing their markets. For example:

7.1. Margin and collateralCollateral and margin requirements can delay the settlement
process by requiring additional steps to manage risk and ensurethat there is sufficient collateral to cover margin loans. Whilethese requirements are important for managing risk, they canalso increase complexity and delay settlement in some circumstances. Here is an illustration of how this can happen:
Assume that a retail investor wants to buy 100 shares of acompany’s stock. The investor does not have enough cash on
hand to pay for the shares outright, so they decide to buy theshares on margin, which means that they borrow money fromtheir broker to complete the purchase. The broker will require
the investor to provide collateral, which is usually in the form of
cash or securities, to secure the loan. Such a process could wellextend to institutional clients in a T+1 scenario to facilitate prefunding (see below) in a tighter settlement cycle where putting
full funding in place may become more complex.
In order for the trade to settle, the broker will need to ensurethat the investor has sufficient collateral to cover the marginloan. If the investor’s collateral falls below a certain threshold, the broker may issue a margin call, which requires the investor to deposit more collateral or sell some of their securities
to cover the shortfall.
The process of providing additional collateral or selling securities can delay the settlement process. If the investor is unable to provide additional collateral or sell securities quickly,
the broker may need to take additional steps to manage the riskof the trade, which can further delay settlement. For example,
the broker may need to buy securities in the market to cover the
shortfall, which can take time and may incur additional costs.
7.2. Prefunding
We now turn to the cost of pre-funding. In the context of settlement, this is a process in financial transactions where funds
are required to be available in advance to ensure the successful completion of a settlement. In international investing, settlement pre-funding may be necessary when buying or selling securities or assets across different countries or currencies,
where currency exchange (FX) transactions are involved requiring careful management for FX spreads and overall liquidity
management.
Based on our empirical work, we suggest a formula to calculates the approximate cost of settlement pre-funding in a shortened settlement cycle in the international investing market. It
delivers the approximate cost of settlement pre-funding in ashortened settlement cycle in the international investing market!
Spread at T+1 − Spread at T+2
π=α·θ·ν·
Spread at T+2• A short-term solution may be to copy the India approachand have a phased migration, starting with smaller stocks
and moving to internationally traded stocks as a second
phase. This would allow for testing and for standards tobe fully established which international investors can moreeasily add to their processes.
• A longer-term approach could be a dual settlement window. Currently the securities processing service of the8Trans-European Automated Real-Time Gross Settlement
Express Transfer (TARGET2) system has two securities
settlement windows, a real-time window, and an overnightwindow. Adding a settlement window which better allows for non-domestic time zones to settle may ease nondomestic market participation.

7.3. Reducing the paper trail
We now address the legacy of paper-based payment instructions. While payment instructions are increasingly being transmitted electronically, some payment instructions may still require paper-based checks or other physical payment methods.
This clearly stands in the way of accelerated settlement.
Some issues are obvious, such as the physical mailing of documents. While many documents are transmitted electronically,some settlement processes still require physical posting, suchas stock certificates, trade confirmations, and delivery instructions.
These paper-based systems can slow down settlement processes and increase the risk of errors or fraud. However, efforts are being made to digitize these processes and reduce
the reliance on paper-based systems going forward. In particular, the increased use of electronic signatures (Warasart andKuacharoen (2012))• Allowing for netting to take place during each window
would potentially add more windows to approach nearreal-time processing, but with multi-batch netting windows still possible.
• Better alignment of foreign exchange settlement timetables with T+1 and other accelerated securities settlement
cycles by shifting foreign exchange markets to a normal
cycle of T+1 or T+0.
These moves would not necessarily deal with the pre-funding
and time zone challenges which investor may have encounteredwhen engaging with accelerated settlement trading regimes, butthey could be explored as a way of at least minimising the impacts.
Along a similar line of thought, the Canadian Capital Markets Association (CCMA 2023) has suggested a small change
which could be of great benefit to international investors.

8. Methodology
The research team adopted a two-stage qualitative research
process comprising unstructured interviews followed by focus
group workshops. The research team conducted 44 unstructured interviews with key stakeholders in the financial industry to gather insights on industry preparedness for accelerated
settlement. The interviews were conducted from a cross border perspective (as distinct from a US domestic perspective).
The interviews were further supported by two workshops. The
themes explored with participants in the focus group workshops
were derived from both the literature and findings from the unstructured interviews. One workshop was held in London (18attendees) and Edinburgh (28 attendees). London was chosen
as it plays a key role in global market decision making, Edinburgh because of its high concentration of wealth and fundmanagement firms and their key service providers, global custodians. In addition we spoke with 5 people who did not wish
to be interviewed either because they were unsure about procedures to be allowed to or because they had little insight into accelerated settlement but did share useful background information on settlement environments as they currently stand. Theseviews were gratefully accepted as informing the research team
but were excluded from the formal research.
Across the interviews and workshops undertaken for thisresearch, participation included a wide range of investment
fund managers and wealth managers (44 interviews and participants), custodial firms (14 interviews and participants) andthe balance being key infrastructure providers (such as central
repositories), technology providers and knowledge providers(key consultants).
The focus of our research was on the fund management
and wealth community, with interviewees representing firms
with $13.9 trillion of funds under management and the custodians with assets under custody of a combined $57.4 trillion.
Firms representing an additional $35 trillion of funds under custody and management attended the workshops, excluding firms
which took part in both the interviews and the workshops.

• The overnight cut off time for settlement input be 4am on
T+1.
This means that instead of by 9:00 p.m. ET at the end of
trade date, either the threshold should be up to 3:59 a.m. ET on
T+1, just before the 4:00 a.m. ET start of the next-business-day
settlement process, 9am in London, 10.am in Frankfurt. While
the window to resolve exceptions and perform reconciliations
would be early and more compressed, it would nevertheless be
more accessible for international investors, at least until multiple cut-off times can be introduced to the system allowing nearreal-time settlement.
Not surprisingly there are moves in Europe to migrate to an
accelerated settlement cycle. The UK has established the Accelerated Settlement Taskforce (HM Treasury December 2022)with the aim of accelerating UK settlement, a possibility our interviewees thought relatively possible given the central natureof the UK markets and the CREST settlement system.
In mainland Europe, The Association for Financial Markets
in Europe has set up a working group to look into T+1 settlement (Asgari, FT, March 2023), however, our interviewees
saw European migration as the much greater challenge given
the number of execution markets and securities depositories. In
addition, while such an acceleration would bring benefits to theEuropean markets in terms of reduced counter-party risk andaccess to funds for clients, it would only partially deal with thepre-funding issue faced by investors selling European stocks
and buying T+1 US stocks. The pre-funding gap could be reduced by a day, but there would still be a next day settlementof a trade and then a wait for currencies to be converted into
dollars on the current standard T+2 cycle.
9range of participants. Further, two of the directors (co-authors)of ISITC Europe facilitated interviews so that a peer-to-peer
discussion was possible where all participants in the interviews
had equal knowledge of securities operations in this complex
area, allowing for a flexible interview where unexpected issues
being raised could be pursued in some depth. The academic interviewer supported the interviews and guided them back to thecore subject as and when needed.
The data collected from the interviews and workshops is kept
in Otter transcripts and a Taguette tags file. These tools allow for easy organization and analysis of the data, with theTaguette tags file serving as a tool for identifying and categorizing themes and patterns within the data. The results are thensynthesized in an Excel spreadsheet built from the tags.
Overall, the unstructured interview method provided a valuable tool for gathering in-depth, qualitative data on a specifictopic. The informal and conversational nature of the interviews
allows participants to share their perspectives and insights in amore natural and unrestrained way, leading to a rich and nuanced dataset that can be used to inform decision-making andpolicy development.
Thematic coding of unstructured interviews is highly time
consuming given the in-depth nature of the interviews, nevertheless it was an essential component of the research.
In total 81 different tags were used identifying positive andnegative sentiment across 30 themes with a total of 1007 indepth statements from wealth and fund management and custodial interviewees being tagged. The statements were categorised according to whether they represented positive or negative sentiment to the theme. This provided a rudimentary ability to produce sentiment indicators on each theme, the coding being an inductive process with tags developed from interview interpretation (see for example Linneberg and Korsgaard(2019)). Sentiment indicators have become a key form of research method in recent years, often using unstructured data,such as web reviews, to draw out overall meaning Often thisform of discourse analysis drills down to counts of individual
positive and negative words. Here we do not mean this automated analysis of individual word meaning, but instead a full
appreciation of the interviewee’s full statement and its meaning.
Indeed, we compared our overall sentiment findings to that
produced by Microsoft’s Azure Machine Learning Sentiment
Analysis tool. While others have found this tool to be effective in building sentiment analysis from unstructured texts, wefound that the automated tool was producing false positive indicators. The reasons for this seem clear and related to using
expert peer-to-peer interviewing techniques. During the interviews a lot of positive statements were made which were directed at the type of discussion underway. A question on, forexample, the impact of T+1 settlement on the availability offoreign exchange to settle a trade. The usual foreign exchange
settlement time is T+2. As a result, any selling an equity listed
outside of the US will mean a natural delay in making funds
available to purchase an equity in the US dollars. The mentionof this would often elicit a positive initial statement. For example, “that’s a very good issue to bring up”, but then the respon-

Wealth and Fund managers and global custodians were identified as the key stakeholders. The wealth and fund managers
directly make decisions about which stocks they wish to holdand initiate trades, while their custodial service providers provide both traditional custodial services of safekeeping and asset
servicing (including the collecting of dividends, executing corporate actions) as well as providing other vital services to theircustomers from middle office risk management data through tofunding and foreign exchange services, depending on the levelof service the fund or wealth manager requires. It should be
noted that while 24 percent of participants worked for North
American firms, most respondents were European-based somewith global management responsibilities, some with regional
responsibilities.

With respect to the sample the interviewees were sourced using a convenience sampling methodology, utilizing the networkof the International Securities Association for Institutional
Trade Communication Europe CIC (ISITC Europe). ISITC Europe is a non-profit Community Interest Company for capital
markets standards and operations. ISITC Europe has deep links
with operations departments across the European and the global
financial service industry and was able to bring together a wide10

dent would then say something negative about this. Machinelearning sentiment analysis tools not only capture the negative
sentiment, but also the positive regarding the direction of theconversation. We have therefore used sentiment indicators toshow the simple balance of negative views verses positive view
when understanding the full meaning of the statement which
has been tagged.
There are of course weaknesses in the unstructured interview,especially using expert interviewers to lead the discussions. As
the interviewers became familiar with the initial interviewee’s
views, these naturally guided future discussions, drilling down
into views already expressed to see if they were common tolater interviewees thinking. This made interviews efficient atgetting to the core points, but somewhat lacks the non-linkageof thinking which traditional survey has but allows much deeper
discussions about the key themes as they emerge.
Using expert interviewers produces an unexpected challenge
as several interviewees used the interviews as an opportunity togather information themselves from people with greater expertise on some of the issues and some of the changes currently
underway. As in the results, this was a particular issue for small
wealth and fund managers in the UK, Europe and Asia wheresome interviewees noted that their first knowledge of T+1, or
their first research into the timetable and challenges of T+1,
was initiated by the invitation to be interviewed on the topic.
This can mean that on occasion, the interviewers were producing as much transcribed material as the interviewee as the interviewees took the opportunity to gain insights and indeed freeconsulting from then interviewers.
The final challenge of the method use was the quality of theOtter AI transcripts. Unfortunately, with very technical terms
being used, the AI interpreter was often inaccurate. Terms
such as automatic buy-in, where a firm has to buy-in a stock
where the initial trade has failed to be delivered, was usuallytranscribed as “automatic Biden”, and the exchange Eurex as
Urine-X. For the researchers this was a time-consuming issue
where the original recordings often had to be referred to so as
to verify the meaning. It has been agreed that the transcripts
be manually updated so as to make them of accessible to futurescholars.

ability to trade in established T+1 markets such as US Treasuries, though these are relatively simple products with a highlevel of standardisation. Very much for the same reason, T+1
markets needs to be at or near real-time. This is to facilitate
internal position keeping. Custodial firms and brokers alreadyhave well advanced real-time capabilities and believed themselves well set for T+1 equities processing.
One large global fund manager reported that they were readyfor accelerated settlement technology wise but suggested that
smaller firms were not. “We already have real time communication with custodians, we already have real time communication
with the brokers. There isn’t really a delay on our processes
that we could address that will make the whole process better.
There are smaller organisations out there that don’t use all theplatforms available to make the process more streamlined, andthey don’t have all the controls and the processes in place like
we do” (Respondent Anonymised).
The quote above seems accurate, that while large firms use
automation as an where they can and have control mechanisms

9. Results and discussion
We now present edited highlights of our interviews and results.
9.1. Information and Technology
Our analysis shows that technology barriers were not initial
seen as a significant challenge by the sector in the advancementof accelerated settlement, though challenges clearly existed andas we drilled down, it became more apparent that challenges
existed. Comfort was taken by wealth and fund managers thatthey had systems which to a large degree they saw as capable ofreal-time reporting, primarily because they had real-time position keeping capability providing a real-time overview of theirportfolios and trades. Further they took comfort in the current
11

to minimise the risk of non-compliant instructions being sent totheir custodians, many small wealth and fund managers are yet
to fully automate trade instructions.
Activities such as reporting trades to custodians for settlement were often not done in real-time and the majority of firms,
both on the buy-side and custodial side reported significant useof batch processing and reported that they knew of batch processes existing in other parts of the settlement chain. For manybuy-side firms, end of day files of trades were still sent to custodians for overnight batch processing. Some had instead moved
to a multi-batch processing system, sending regular batches oftrades to their custodians for processing. This was particularly
useful in markets where multiple settlement windows exists,such as Target T2S systems with intra-day settlement window
and an overnight batching process.
While batch processing clearly still exists and will need substantial re-engineering to remove or at least accelerate massively for accelerated settlement regimes. A number of firms
still took instructions through emails, faxes and even throughpaper orders with physical share certificates to process. One of
the clear advantages of moving to accelerated settlement process is the extra pressure to end the use of paper and other nonstructured non-straight through process processes, but this is nosmall challenge.
One custodian confirmed apocryphal information that somecustomers still make extensive usage of emailed spreadsheetsand even faxes, and in exacerbation adding the words “carrier
pigeons” to send instructions (Respondent C1, Global). Investment managers and wealth management companies in mainland Europe continue to instruct custodians, fund administrators and transfer agents by fax transmission. The issue is especially prevalent amongst smaller firms which have not invested
in technology to automate their instruction processes. They often have a large community of service providers which could bereached via open multi-lateral mechanisms, such as Swift network, but this adoption has not necessarily occurred amongst
smaller firms. Custodians will unofficially state that they canreceive thousands of faxes per day. Germany and Luxembourg
are often cited as the prime source of this issue. The fax recipients are reluctant to challenge this antiquated practice becauseof the highly competitive nature of the market.
The issue does not attract policy focus because it is effectively unregulated and there is no requirement to disclose detailed costs. Custodians will normally try to disincentivize inefficient forms of communication; both fax and email, by charging higher fees. However, this driver does not appear to work:
the additional cost of sending a fax is paid by the fund – not thefund manager – and is hidden within overall post-trade/custody
costs. This is a very clear example of what economists refer toas the agency/principal issue. There is no effective incentive forthe fund manager, acting as an agent, to automate and become
more efficient. The excess cost is paid by the underlying client:
the investor.
A large Asia-Pacific based wealth and fund manager foresaw
problems with accelerated settlement in those firms still relying
on batch processing and re-keying. “The problem with batchprocessing or manual keying and stuff is you start to get errors

coming through and you get differences, and they take people
to fix them. . . that takes time. Therefore, your shortened cycle
becomes a challenge for them. So yeah, there’s going to besome challenges for some of them. Especially if they’re on
antiquated technology as well” (Respondent WFM 6, Asia Pac).
Not surprisingly custodial firms, who so often are the recipients of antiquated formats and instructions are keen to see one
outcome from the move to T+1 and that is the forced adoptionof improved technology and processes by their buy-side customers.
9.2. North American timetable
At the time of interviews, the US and Canada had announced
their plans to deploy T+1 settlement and India was in the process of implementation. However, the buy-side sector was ingeneral waiting for details of the US/Canadian process to beformalised and a final date announced before devoting funds toaccelerated settlement, even though the full playbook and requirement had been published.
The general attitude to making staff and technology resources
available to deal with migration to T+1 was “we’ll deploy resources when we have a firm date”. It was the US which dominated thinking on T+1 as it was the key international investment location, India was seen as a primarily domestic market
with some outside portfolio investment, but these investments
were often not actively traded.
A lack of dedicated resources for the required change programme made many firms concerned about the North American
timetable. Firms expressed both a lack of knowledge of the proposed changes and deep concerns about the timetable. Smaller
non-US registered buy-side firms expressed little knowledge
about the challenge of T+1 this in turn made them doubtful
as to their ability to deliver timely implementation of new T+1
settlement processes for their North American activities.
At the time of interviews, a debate was underway about
whether the US and Canada could move to T+1 in March 2024
or Labor Day of September 2024, which is a holiday in boththe US and Canada. The strong opinion was that March was
12unachievable, and that September 2024 was highly unlikely as
well, but was the general default position.
Since the interviews, the US’s SEC has determined that thecompletion date for T+1 migration will be 28 May 2024, notonly were firms rejecting March 2024 as unachievable, but mostthought September was also difficult to achieve, May 2024 isclearly therefore a date seen by most non-US based operations
as challenging to the extreme, creating implementation risks.
While underlying technology was not a key concern, smaller
UK, European and Asia-Pac buy-side firms had not yet deployed IT or other resources to work on the project as they were
waiting for a firm date and firm set of rules, to work to thoughlarger ones had started the process. One global US owned fundmanager noted they had 28 work-streams working on various
aspects of the required changes, itself illustrative of the challenge the firms yet to start their projects faced.
However, a smaller UK-base wealth manager recognised
they needed time to get their systems in order, even though
they saw themselves as reasonably technologically advanced.
“There’s a lot of technology improvements many firms will
have to make. If you go over T+1 you’re looking at sort ofautomation across the board really if you want this to work
properly, and I think that will not go in overnight” (Respondent
WFM 11, UK). A global custodian thinking about their wealthand fund manager customers and speaking before the North
American date for T+1 was formalised noted he had seen very
little preparation going on “if the US is serious about bringing this in 2024 or thereabouts, I’m not seeing anybody making
dollar investments in their core platforms yet” (Respondent C2,
Global).
Moves to T+1 in parts of the world were seen as having
mixed prospects. India adopted T+1 towards the end of theinterview processes, however, as this market is primarily domestic, neither wealth and fund managers or custodian’s had
major concerns.
In Europe, the challenge of coordinating agreement between
countries to consolidate the operations of 41 trading exchanges,
18 central clearing counter-parties and 31 central securities depositories, was seen as daunting, especially with the need topass legislation to undertake this feat with an EU parliamentaryelection due in 2024, though some wondered if primary legislation was actually required.
The UK, however, was seen as being in a stronger position
to follow the US and Canada and adopt accelerated settlement.
There were two primary reasons for this. Firstly, interviewees
saw the UK as not too dissimilar to the US with a centralised
equity settlement system. Secondly, there was speculation that
there was political will behind accelerated settlement to show
some post-Brexit benefit. However, as we will discuss in thenext section, what those benefits are, whether in the UK or Europe was very hard for several interviewees to identify.

of funds when demanded by clients on the sale of an equity(see introduction). However, when it comes to the introductionof T+1 settlement in North America, there is a strong sentiment that the international fund management community has
had limited input into the discussion and are concerned that themove to T+1 in North America will lead to additional costs,
awkward operating challenges and the potential for more failed
trades than under the current system. Surprisingly some operational staff at custodians have expressed some concerns about
the business case as well, primarily because they see great challenges facing their wealth and fund management customers.
One noted “I think the benefits are likely to accrue to the US
and not those outside the US” (Respondent C5, Europe).
Both wealth and fund managers and custodians recognise thecore benefits of reduced counter-party credit risk because of the
reduced exposure to incomplete trades. However, the concern
is that this only applies to firms who are very close to the central
market, those which have large margin requirements and large
capital requirements for counter-party risk – in others words

9.3. Timezones
The business case for accelerated settlement has been clearlystated, it is that moving to a shortened settlement period, in
this case T+1, will lead to dramatically reduced margin requirements within the settlement system and more rapid availability
13the large brokers and large custodial banks. Wealth and Fundmanagers cannot see how this will filter down to them or theirclients, while their operational costs will increase, especiallyfor non-US domestic fund managers.
The first question facing non-US wealth and fund managers
are the inconvenient deadlines which will come with accelerated settlement. For example, in the US proposals affirmation/matching must be achieved by 9pm US Eastern Time (3amFrankfurt) and authorized trades being introduced to central
clearing at 11.30pm E.T. (5.30am Frankfurt). These firms see
only extra cost as the outcome. They are challenged as to how
they will “follow the sun” to achieve T+1 as it is introduced
across the globe, but especially in the US. Some firms werelooking to build up their offices in the US, if they already haveone. Others could consider putting operational staff on shift
work. Others, outsourcing to third parties, noted that many of
the custodians undertake much of their work in Asian processing centres.
Several the wealth and fund management institutions weretaking a passive stance and were looking to their global custodians for a solution as they had not as yet come up with theirown strategy.
Many fund managers believed that the current available fixes
for dealing with difficult time zones and cut-offs do not fully
deal with exceptions occurring which require the input of theoriginal decision maker, for example the fund manager who initiated the trade. If they are required to input, it is most likely
they will not be contactable and a trade might then fail. Notably, the firms we spoke to are currently fairly satisfied with theperformance of their settlement environment, they all reported
settlement efficiency in the very high ninety percent range withvery few failed trades. They are concerned in an accelerated
environment trade fails will increase with both reputational andfinancial costs associated, whether these costs are penalties for
failed trades or the cost of buy-ins where the trade has to besettled using a different third party. For example, if a fund does
not get its sell order.
9.4. Foreign exchange, pre-funding and operational costs
Custodians also recognised these challenges for their customers and operational staff saw increased costs as likely intheir area, clearly the financial benefits of reduced counterparty
credit risk lie elsewhere in the organisation. It is also the custodians who will directly face penalties and the cost of buy-ins
and therefore will have tom decide if they will charge buy-side
customers for these fails, absorb these costs to keep the business, or even potentially screen out buy-side clients who generate too many fails.
More worrying for wealth and fund managers is that there
are costs which they may not be able to engineer out of theirprocesses in a scenario where North America, moves to a T+1
process but other geographies do not. The key problem is moving money from one market regime to another across the globe.
If, for example, a fund wishes to re-balance its exposure to thebanking sector it may wish to sell Deutsche Bank shares andbuy Citi Bank shares. However, they then face a long delay inthis process. With Europe on an equity settlement cycle of T+2,

it will take two days for the Deutsche Bank sale to go through,and then on receipt of the Euros, the fund manager will thenneed to exchange these for US dollars, again the usual cycle isT+2 (it can be done faster but at increased cost). Therefore,
there is an out of market risk. Effectively there is now a prefunding challenge, where buy-side firms will need to make sure
US and Canadian Dollars are in place before any purchase ismade.
One large European based fund manager was considering increasing the size of its US office which would give it one potential solution, but equally it was also considering the cost of
pre-funding and Foreign Exchange services from its custodians.
“So currently, it’s an issue where we don’t have a solution yet
and we think, potentially [...] we’re going to explore this more[...] Potentially, we’ll look to custodians more [...] but equally,custodian FX rates aren’t always the best” (Respondent WFM
14

1).

margin requirements. The overwhelming sentiment was very
negative on the issues of foreign and exchange and pre-funding
costs.
One other sub-sector which was seen as extremely exposedto the timetable restrictions created by accelerated settlement
was the stock-lending. Fund managers who lent stocks havea choice of arranging it themselves or through agents. If theychoose the latter, either through nominated agents or throughautomated programmes run by their custodians, agents and custodians can take as much as 80% of the very small revenues
stock lending can generate, meaning incentives to continue offering stock for lending are quite low for many smaller buysidefirms. . Respondents to our interviews suggested that stock
borrowing could aid in overcoming very tight settlement deadlines, allowing stock to be borrowed to cover potential settlement problems. However, they were universally concerned withhow they would recall stock if they needed it to cover their own
trading activity.
Nevertheless, a global broking house saw opportunity forstock lending playing a role in a shortened settlement period,
but with a fair degree of re-engineering. “on a T one basis
means there’s still opportunity and scope for lending to haveits role. We might need to think about not just loaning positions
on an overnight, two day or three day basis, we might have to
do loans by the hour.”
However, it is the re-engineering which is important as respondents reported it as a process which is plagued by manualand ad hoc processes, especially if the fund manager is involved
directly with stock lending, making recalling stocks from lending programmes a challenging affair. Even if it was left tothe custodian and their automated stock lending programmes,
problems were still seen as potentially insurmountable given
the very tight recall window required and many fund managers
doubted their ability to make stock available. One fund manager reports “So all of the time compression that we’ve seen
[moves to accelerated settlement], does nothing but make securities lending harder and more expensive and less effective.
Right?” (Respondent C6, Global)
This is a potentially perverse outcome where a policy aimed
at increasing liquidity, that is an accelerated settlement environment delivering funds and assets more quickly as investors trade
them, could undermine another liquidity tool, that is stock lending. Conversely, we see that this as another area where a tightaccelerated regulatory implementation timetable may force innovation and automation onto an area of the industry with relatively low levels of straight through processing, even thoughfund managers were highly doubtful at this stage.

Our interviews with wealth and fund managers suggested
they are minded to simply accept the situation and effectively
impose the out of market risk on their customers, selling thenmoving funds into the target currency and then making the buy
order. Others, especially funds where their rules require them
to be fully invested and firms with large more sophisticatedclients, have a bigger challenge. They will need a method ofproviding pre-positioned funds or face a serious challenge. This
could be an arrangement with their banks, with their brokers,
or with their custodians. Indeed, most interviewees saw extra
service offerings, potentially including funding, as an opportunity for global custodians. However, such funding comes ata price and itself might require fund managers to change theirfund rules if they currently exclude them from taking on overdraft or other debt positions.
For many firms, the cost of pre-funding was simply an unknown at the time the interview teams spoke with the interviewees. One large European based fund manager simple asked“What’s the cost to that pre-funding? And what challenges doesit bring?” (Respondent C3, Global).
There were other challenges specific to non-domestic firms.
For example, if an Australian or Asian fund manager was tocommit to a deal in the afternoon of their time zone, US markets would not be open to begin executing the trade. Further,
if this trade was made on a Friday afternoon and there was a
US bank holiday on the Monday, the ability to process the tradein time for T+1 settlement is clearly impossible. Another issue raised was by a developing world central securities depository which noted that there was an arbitrage opportunity on dual
listed shares where a share is listed in a T+2 regime and simultaneously in a T+1 regime. It would be likely that sell orders
would favour the T+1 regime if possible where funds would
be obtainable more quickly potentially leading to further disconnects between prices between shares traded on a T+1 and a
T+2 exchange.
These issues are not seen as insurmountable, but they areseen as adding costs which may well not be recoverable frombroker/dealers and custodians who will benefit from their lower

9.5. Risk
Clearly there is a strong recognition that there are powerfulrisk arguments for accelerated settlement. One point made wasthe challenge of open positions at the start of the 2022 RussoUkraine war and how to resolve trades in which one counterparty no longer had access to the settlement system following
sanctions. A Global broking house noted “recently we saw, theunfortunate Russia Ukraine situation and suddenly settlement15

available.
One global custodian speculated that “[it brings] everythingin so tight that is it actually creating risk as well. operationalrisks instead of credit risk”. They were further concerned about
how the Basel capital regime might treat this increased operational risk in the future. Given the operational focus of many of
our interviewees, it is maybe not surprising that perceived operational risks would increase as settlement timelines are shortened. However, to achieve accelerated settlement, a forced investment in automated affirmation/matching and an increase instraight through processing will have an impact also, potentiallydecreasing operational risks.
10. Conclusion
We researched industry preparedness for accelerated settlement. Our interviews clearly show that operations staff at
wealth and fund managers are less prepared for accelerated settlement than the custodians and regulators. While the clear andmeasurable benefits of T+1 and other accelerated settlement
regimes are not generally disputed, the overall impact of thisresearch is that there are very fundamental concerns.
Benefits accruing to broker/dealers and associated custodybusinesses from reduced counter-party risk, lower settlement
margins and, for wealth and fund managers, the improved access to funds for customers are all recognised. However, wealthand fund managers in general, at least those outside of theT+1 migration regimes, are highly negative in sentiment. They
struggle to see how the benefits accruing to brokers and custodians will reach them while and their customers while they see
themselves as facing new operational costs and new operationalrisks.
We identified the costs pre-funding and of operational disruptions as a further area for research. The benefits of reduced
counter-party risk and reduced margins have been measured by
the organisations supporting the move to accelerated settlement.
There is a need for the buy-side industry, especially the nondomestic buy-side firms who so actively buy into and trade theUS equity markets, to model the costs of pre-funding to establish what the net improvements from acceleration actually arefor them and for the US economy. This research should be coupled to an analysis of the cost of creating real or virtual “follow
the sun” capabilities for the securities operations departments ofthese firms as accelerated settlement expands across the globe.
Modelling the impact of operational disruptions and the potential costs these would entail without a “recovery day” is also
critical to measuring the net outcome of moving to T+1 andT+0 settlement cycles. From the discussion and comments on
pre-funding, policy makers will clearly wish to consider:halted, right and trades were in flight. And I was thinking actually at that one point in time we had twice the number oftransactions open because it was T+2 and that could have been
halved” (Repondent C3, Global).
Further, the very great benefits in terms of margin and theforced-use of higher levels of automated affirmation and general straight-through-processing were recognised. Despite this,
there was a general concern about transferring risk from wellmeasured and understood financial risks (primarily counterparty credit risk) to less well understood operational risk.
Questions as to exposure to systems failures, exceptions handling, reconciliation handling, central market/settlement downtime were all raised. Concerns about the lack of a recovery
period, a day of “grace” to catch up after a disruption, were
many. This was especially true for, again, those firms outsideof the T+1 jurisdiction who due to the time zone issues will potentially see exceptions arise when key decision makers are not• Aligning their settlement systems with the largest market
in the world to mitigate discontinuities between markets
and to encourage portfolio locations into their own countries.
• Engaging with regimes with accelerated settlement processes to ensure equal access and avoid the migration of
key decision makers and processes to offshore locations.
16Individual firms will likely wish to:

While, T+0 atomic settlement would end netting, which isseen as a valuable capability, T+1, maybe seen as a compromise regime. Nevertheless, it still creates enormous challenges
for non-domestic players. The globalisation of markets makes
the migration of the US and Canada region to a T+1 regime difficult for investors to comply with, although they must as thesemarkets are essential to the customers of non-North American
wealth and fund managers.
Awkward time zone issues and discontinuities between overseas investors’ domestic securities markets and the foreign exchange markets can introduce costs difficult to totally remove,even if intermediary firms can help reduce these difficulties, at a
price. Concerns over the ability of operations to prepare for accelerated settlement on a very tight timetable (as imposed by theNorth American change programme) and on-going concerns as
to the ability to cope with operational risk failures add to theconcerns firms have, especially buy-side institutions outside of
the North America.
It is also quite clear that strengthening resilience throughmore sophisticated backup and disaster recovery strategies
would also help ensure that settlement processes can continueeven in the face of unexpected disruptions, such as natural disasters or cyber-attacks.
We find that initiatives to improve automated affirmation andstraight-through processing have not always met with successwith firms taking the attitude that they were optional extras.
Regulatory mandating of faster settlement will clearly force thehand of all firms to improve their processes, creating both efficiency, risk improvements and faster access to funds for theircustomers. The timetable and the potential cost of pre-funding
for non-North American investors work against this.
A part of this effort, especially in the US rather than Canada,
has been looking for a solution to the “Meme” stock collusion
which left new era brokers on the brink of failure. Arguably
a domestic challenge involving under-capitalised brokers has
forced the SEC and other authorities in the US to look for an
operational solution to the challenge, rather than taking an alternative approach. Instead the decision is to make the operational change to T+1 even at the cost of inconvenience for portfolio investment into the US by non-domestic investors (which
is worth trillions of dollars and which is essential for a country with significantly negative trade balances – capital flows areimportant). Nevertheless, while such motivations are clearlya domestic US one, accelerated settlement is becoming a key
target for regulators across the world, however, this leaves anumber of unanswered questions to be resolved.
In summary, the industry is firmly on the road to accelerated settlement. Our research shows that there are several areas where preparations need to be enhanced, but there are alsosignificant technological solutions that can now be applied. We
conclude by reiterating the need for an orderly and smooth transition to instant and ultimately simultaneous settlement.While
many firms, especially outside of North America and on thebuyside of the industry are very focused on the costs of implementing T+1 and the operational complexities imposed byinconvenient time zones, the forced adoption of higher levels of
automation will in the long run produce benefits. At this mo-• Clearly establish for each accelerated regime what thepenalties for missing T+1 settlement deadlines are(whether penalty fines or automatic buy-in costs)• Consider contractual mitigation where possible if theycannot cost effectively meet the settlement deadline byestablishing settlement contracts with all counter-parties
where compliance with settlement standards can be abdicated by contractual agreement, though such arrangements
could put firms with cash arrangements at some disadvantage in some scenarios.
Technology is a key issue that needs to be addressed as thereadying of firms for straight through processing is essential for
not only improving the ability to comply with accelerated settlements, but also introducing huge benefits in terms of efficiency
and operational risk reduction. Shifting as much of the industry
to automated matching and affirmation systems as possible, removing unstructured instructions across the board and as soon
as possible ending the role of paper certificates and paymentsfrom the system will improve compliance and reduce costs.
The US has clearly made the choice to set a firm and challenging deadline to force the industry to make these improvements rather than mandating the changes required first (such as
mandating the use of automated matching and affirmation before then introducing an accelerated settlement regime). Thisis one way of achieving these goals, however, the slow start by
non-US firms on project planning to achieve this is very concerning and failure to put in place the changes needed will leadto increased fails and extra costs for international investors in
the North American markets.
Clear steps need to be taken to implement the migration toaccelerated settlement processes:• Automated affirmation and straight through processing
levels must dramatically increase to ensure that current
high levels of settlement efficiency.
• Work to remove batch processes, especially overnightbatches which will not meet the new deadlines.
• Remove nonstandard instructions and paper from as muchof the system as possible.
Given the key concern of respondents to the interviews abouttransferring risks from the financial realm to the operational
realm, careful re-engineering of systems and processes will beessential to at least minimising the costs of operating in accelerated settlement regimes and avoiding operational risk failuresand costs. However, our research shows that acceleration cancome with significant costs, and, maybe less intuitively, risks.
The arguments for accelerated settlements are strong, markets such as India are already on a T+1 cycle and mainland
China us using a T+0 cycle and the benefits can be seen. However, our research shows that acceleration can come with significant costs, and, maybe less intuitively, risks.
17

ment for many these seem a distant benefit, but as the rest of
the world also moves to accelerated settlement regimes, these
are challenges which will need to be addressed,

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Acknowledgement
The Research team would like to extend its grateful thanks toall of the people and associations around the world, who gaveof their time and expertise to participate in this research. In
particular to Swift who hosted the T+1 workshop in London
and Richard Leigh at the SIO (Scottish Investment Operations)
who organised and hosted the T+1 workshop in Edinburgh. To
PIMFA who galvanised their members into taking part and ofcourse to all the people at the Swift Institute who commissioned
the research and facilitated introductions to additional participants in the Asia Pacific region.

18

Figure 2: Findings Summary: Preparedness

Challenge
Knowledge of the T+1 challenge

Wealth and Fund Managers
Good among large fund managers –very poor among smaller firms

Timetable North America

Non-US domestic managers are worried about the US timetable

Technology challenges

Little resource put into T+1 migration
by smaller firms and little analysis ofchallenges. Larger effort by global fundmanagers with key challenges identified

Batch processing andunstructured instructions

Batch processing still endemic.
Even firms which
operated with “real-time” position
keep still often usedbatched instructions
to custodians.
Some still had paper shares to process.

Timetable elsewhere, UK and Europe

19

Custodians and Brokers
Good
Internally more comfortablewith timetable, worried
about customer capabilities
Fair levels of confidence ininternal change programmes,
some doubt as tocustomer migration speeds.

Still high levels ofbatch processing often driven
by customers.
Still having to deal
with unstructured instruction
from client
wealth managers including
the use of faxes
UK T+1 adoption seen as
relatively easy as fewer
trade and settlement points
and a structure
not dissimilar
to the US as centralised.
Negativity towards theability of Eurozone
countries to adopt
T+1 because of a plethora of
trade and settlement points

Figure 3: Findings Summary: Business Case and the challenge for non-North American firms

Challenge

Wealth and Fund Managers

Affirmation/matching

Fail rates

Foreign Exchange

Pre-funding

Follow the sun operations

Mismatched time zones
and public holidays

Extremely concerned about
how they will match
funding when it involved
the sale of a security in one currency
for purchase of a security inanother currency
An extra costwhich may be difficult to impossible
for buy-side firms toengineer out withoutchanging fund rules, or passingout of market risks to clients
A choice to be madebetween shifting some operations
to the US/Canada, enabling shift workat the home locationor outsourcing decision making to athird party or a custodian
A key concerned raisedby several buy-side managers

Custodians and Brokers
A strong feeling that
accelerated settlement willlead to a very large increasein the take up of automatedaffirmation systems
and increased level ofstraight through processing
greatly to the benefit ofefficiency and risk reduction
Both sets of firms concernedthat fail rates may
increase undermining currently
very high settlement efficiency.
Recognition of the challengebuyside firms have,thought the potentially for
add on services increases

Recognition of the challengebuyside firms have,thought the potentially for
add on services increases
Embedded in all global custodiansand potentially aservice which could be offeredwith additional
middle-office outsourcing fortheir customers

Potential price differentiation
for dual listed shares
where they are listed on both
T+1 and T +2 systems

Dual listings

20

Figure 4: Findings Summary: Risk

Challenge
Counterparty
Risk

Transferof RiskOperationalchanges

Lack ofrecovery time

Wealth and Fund Managers
Good understanding of the benefits,difficulty in seeing how
it will feed
down to themConcern that shortened settlement
puts more pressure
on operational
systems anda potential increasein operational risk
Wholesale changes to systems
and processes required
to introduce more automationand straight throughprocessing,
especiallyin the areas of affirmationand matchingThis is the main concern,no day available
to correct errors
or reboot processes,
especially for thosefirms outside of
the T+1 regimes

21

Custodians and Brokers
Clear measurable
benefits
Fair confidence
in internal
operating environment,
though also
worried abouttransfer of risk to operations.

-Custodians have similar
concerns about recovery
times if errors occur