Australia’s Take on T+2: Why Worry?

When it comes to reducing the time it takes to settle trades from three days to two days, the Australian and US markets appear to be a study in 0pposites, just like the seasons.

Although C-level operations and technology executives may be sweating in the blazing summer heat down under, they sound cool when speaking about the move to a two-day (T+2) settlement periods.  Their US peers may be bundling up for the winter weather, but they appear to be sweating bullets as they prepare to accommodate the shorter settlement cycle. Fortunately, they have at least two years to be ready, based on what industry trade groups and the US Securities and Exchange Commission are saying now. No specific date has been set.

For Australians, a shorter settlement period is just around the corner. March 9, 2016 will be a double-duty day with trades executed on March 4 and on March 7 set to be settled on that day.”We have been gearing up for T+2 settlement for some time so there is every reason to believe there won’t be any glitches,” says Rodd Kingham, senior manager of post-trade equities services at the Australian Securities Exchange (ASX) which owns the country’s clearinghouse and securities depository.

The ASX has taken the lead on T+2 for equities, meeting regularly with trade groups representing broker-dealers and custodian banks to ensure they are up to speed on T+2 and publishing a to-do list of their responsibilities. The exchange is emphasizing the need for efficient workflow management for trade confirmations, affirmations, settlement matching, stock lending, payment arrangements and corporate actions. As is the case with their US peers, Australian broker-dealers and custodian banks, representing fund management clients, must ensure that trade details are acknowledged quickly enough to meet a T+2 deadline. The correct value of securities and cash must also be available on T+2.

Members of the ASX will be required to “attest” or certify they are prepared by February 12, 2016 and based on an October poll they are well on their way. About 95 percent of members say they are on track for T+2 readiness while only 1.6 percent remained uncertain. That’s a marked decline from the 24 percent of respondents who told the ASX in June that they had not started their preparations. “The US could take a lesson from Australia,” one operations manager at an Australian broker-dealer tells FinOps Report. “Our middle and back office are already automated and we’re on track for testing.”

Kingham says that the ASX has already implemented the changes necessary to accommodate T+2 on its trading and post-trade test platforms. Therefore, members can be testing their workflows with the exchange now and all the way until the cutover day next March.

The reassuring public tone from down under is a far cry from the worried voices in the US. “Fund managers don’t always allocate trades to individual fund accounts on the day they are executed,” says one operations director at US brokerage. “Even those that do so have other automation gaps in the middle office when it comes to ensuring they have the sufficient amount of securities to meet settlement obligations.” Yet other operations managers at retail brokerage shops are concerned about how they will handle sales of shares from retail investors who hold their shares in certificated form or purchase of shares from those paying by check. Fund management firms counter that broker-dealers are overdramatizing their shortcomings. However, as one acknowledges, “we have to shore up our middle office and are budgeting for technology investments.” As was the case with five others contacted by FinOps, he declined to be more specific.

The Advantage

Taking the rhetoric of Australian financial firms at face value, it is their higher level of automation that will ensure a seamless transition to T+2. With little or no manual segments in the workflow, most errors can be identified and corrected in time. “The main impact on middle office operations will be reducing the timeframes for sending, receiving and processing of institutional client allocations, confirmation and affirmations,” explains Denis Orrock, chief executive for the capital markets unit of GBST, a middle and back-office technology provider specializing in broker-dealers. “So far, our Australian clients say they aren’t worried.”

Most fund management firms and broker-dealers, explains Orrock, are using one of two matching platforms– either the localized one offered by Australian front-office technology provider IRESS or the Central Trade Manager (CTM) from Omgeo. Although no one who spoke with FinOps from Australia would publicly offer an opinion on the total percentage of Australian trades already being affirmed between fund managers and broker-dealers on the same day they are traded, Omgeo estimates it is higher than 90 percent for users of its CTM. For counterparties using the CTM or the Depository Trust & Clearing Corp’s legacy TradeID system for US trades, 64 percent of those transactions are affirmed on trade-day. Omgeo is owned by the US market infrastructure for clearing and settling US transactions.

Of the two popular matching platforms, IRESS is reportedly used by domestic Australian firms, while Omgeo has the lion’s share of international buy and sell-side shops and gaining traction in the local market. The platforms differ in their methodologies. Under the central matching process supported by Omgeo, fund managers and broker-dealers input trade details to the third-party platform concurrently to be either matched or rejected. Iress relies on fund managers and broker-dealers communicating on a bilateral sequential basis, otherwise known as local matching. Omgeo claims 60 financial firms as users of Omgeo’s CTM to centrally match trades in Australian equities and fixed-income securities. IRESS declined to provide comparable figures.

Fund management firms using Omgeo’s CTM or other automated means for matching are also relying on the SWIFT network to ensure prompt post-trade communications, making custodian banks that much more reassured they can meet the ASX’s new cutoff time for settlement instructions from 10:30AM local time on T+3 to 11:30AM local time on T+2. “We find that more than 85 percent of client instructions are received from late on trade date until the morning of T+1, which gives us confidence that T+2 implementation will cause no significant disruption,” insists Miles O’Connor, director of direct custody and clearing in Australia and New Zealand for Citi, adding that almost all of Citi’s foreign clients provide settlement instructions for Australian and New Zealand securities using the SWIFT network.

To ensure a smooth transition to T+2, Citi will be constantly monitoring the time it receives client instructions and providing alternative strategies to those at risk of missing the ASX’s deadline. To that end, says O’Connor, Citi will encourage fund management firms to rely on its proprietary systems for post-trade communications or its global Execution to Custody service where Citi’s clients can execute trades via a Citi broker-dealer affiliate and ensure their settlement instructions will automatically populate its custody system.

The result of all the efficiency: a very low fail rate will not cause a significant increase in claims related to corporate actions, predicts O’Connor, who also represents Citi at the Australian Custodial Services Association. The correct value of the corporate action entitlement will go to the correct counterparty. Claims often occur due to discrepancies in amounts paid and amounts owed when a corporate action event takes place between the time a trade is executed and the time it is settled between a buyer and a seller.

What about having sufficient cash or securities by T+2 to meet settlement obligations? That doesn’t seem to be a problem under the T+3 settlement cycle and Kingham doesn’t expect it will be under T+2. Under a T+3 environment, ASX has an average success rate of 99.9 percent, which means that less than 0.1 percent of equity trades do not settle on time. Under a T+3 settlement cycle, ASX members will continue to be fined a minimum of A$100 a day up to a maximum of A$5,000 a day for each day shares aren’t delivered to meet the T+3 cycle. If there is a shortfall in the funds required to make payment, the ASX’s clearinghouse will tap into the margin account of its member firm.

Why all the confidence? Institutional investors either pre-fund their accounts or can deliver cash to make payments by T+1, Australian fund management firms tell FinOps. “The securities lending market is also mainly automated and liquid in Australia, so there is no problem finding sufficient securities to borrow to meet settlement obligations on T+2 or recalling securities out on loan,” says one operations manager at an Australian fund management shop. “There may be an initial spike in demand for stock when T+2 arrives. However, Citi expects the demand to dissipate quickly as back offices make the final necessary changes to meet the new settlement regime,” says O’Connor.

Retail under Control

Australia’s retail market also appears to be well on its way to meeting a T+2 timetable. Unlike the US, Australia is “dematerialized” with ownership of accounts reflected as electronic blips on a computer screen. Because Australian investors don’t hold certificates, broker-dealers don’t have to worry about a certificate being stolen, lost or not delivered by T+2. Australian investors hold their shares either in the name of their financial intermediary — a scenario called either nominee or beneficial ownership — or in their own names on the books of issuers through issuer-sponsored accounts, otherwise called direct registration accounts in the US. If the shares are held in the name of the financial intermediary, the bank and broker-dealer participants of the ASX’s depository can control when stock to meet settlement obligations is delivered to their accounts. Likewise, they can also move the shares from the client’s account at ASX’s Chess if the client holds an issuer-sponsored account where the client’s shares are held in the client’s name.

For retail customers, who must have their purchase orders funded by T+2, Australian banks and broker-dealers are taking no chances. The ASX’s October survey showed that 24 percent of member firms planned to eliminate or reduce checks as a form of payment. “We are starting to educate our customers to initiate payments on T+1 from their BPAY accounts or direct debits from client bank accounts or linked cashed management accounts,”says one Australian brokerage operations manager. An electronic bill payment system owned by Australia’s four largest banks, BPAY enables payments to be made through a financial firm’s online, mobile or telephone banking facility.

As if being highly automated weren’t enough to ensure a successful transition to a T+2 settlement cycle, Australia will also reap the benefits from market players having already adjusted to a T+2 settlement cycle in Europe and neighboring Hong Kong. Time zone differences won’t be a problem, insist Omgeo officials. The ASX doesn’t keep figures on what percentage of its traffic is represented by cross-border business, but Kingham estimates that about 43 percent of market value is owned by offshore investors and institutions.

So what is keeping Australian middle and back-office executives awake at night? Surprisingly, it isn’t whether transactions in debt instruments can be settled on T+2. Australian bank and Treasury bills and negotiable certificates of deposit which are traded over-the-counter already settle on T+0 or the day the trades are executed. Only a small number of fixed-income bonds which are traded on the ASX will be affected by the two-day cycle, says O’Connor.

If anything, some Australian market players worry whether New Zealanders across the pond will successfully shorten their settlement cycle for equities and fixed-income instruments to T+2 concurrent with Australia’s timetable. Given the amount of cross-border trading executed between Australia and New Zealand based on the large number of dually listed shares, glitches will be costly for market players.  A query to about T+2 progress to the New Zealand Stock Exchange drew no response, except a referral to the T+2 pages on the exchange’;s website. suggesting that either the Kiwis aren’t as outspoken about their readiness or maybe they just don’t want to tempt fate.