October 8: The Witching Day for European Settlement

With at least ten European markets set to implement a two-day settlement cycle on October 6, financial firms need to get ready to complete more than just one goal.

They should brace themselves for a double-duty workday on October 8, warn settlement experts. That’s when they will have to settle trades in equities in at least ten markets executed on October 3, as well as those executed on October 6. Even more — such as Croatia, Cyprus and Malta– could announce they will meet the shorter settlement cycle in the coming weeks, predict some global operations specialists. 

The reason: “The October 8 timetable will be valid for trades executed on both days based on the current three-day settlement schedule, as well as trades executed on the two-day settlement timetable,” explains Janet McGrath, head of Euroclear Bank’s New York office who spoke at a packed gathering of the Securities Industry and Financial Market Association’s operations section in New York on Wednesday.

Although the scenario might not sound troublesome to financial firms accustomed to automated post-trade communications, they shouldn’t breathe easy. “They need to ensure that their back-office operations teams and systems are prepared for the potential doubling of volume,” cautions McGrath. That might also mean that technology specialists have to be called on to do some preliminary stress-testing of the systems.

These words of advice appeared to be closely heeded by fund management, broker-dealer and custodian attendees at the SIFMA-sponsored event, which focused on the pending two-day settlement cycle in Europe and eventually in the US. “We’re allocating additional settlement experts,” said one international operations specialist at a New York fund management firm. Another told FinOps Report, “We’re verifying the scalability of our settlement system to ensure it can handle the additional volume.”

While none of the attendees wanted to predict the percentage of trades that would fail to settle on time on October 8, it is clear that they are concerned. Cleaning up settlement fails can be costly. European depositories do fine their member banks and broker-dealers, costs they would likely forward to fund management clients, and those don’t even include the administrative time lost.

European national and international securities depositories are expected to be ready to meet a two-day settlement cycle and Germany is already among the handful of markets already compliant. However, that might not be the case for their bank and brokerage participants who must communicate post-trade details with their buy-side clients more quickly. To meet a two-day settlement timetable, trades should be affirmed between fund managers and their broker-dealers on the same day they are executed — a scenario made more likely by the popularity of Omgeo’s CTM central matching system in Europe.

“We anticipate volumes of trades to be routine on October 6 when many markets across Europe move to the shorter settlement cycle. Omgeo’s CTM trade and message flows should not be impacted significantly, but we are prepared for additional volume as part of our capacity planning,” Tony Freeman, executive director of industry relations at Omgeo tells FinOps Report.

Because  most of the trades processed through Omgeo CTM are affirmed on trade-date, European financial firms are in good shape to accommodate the T+2 timetable. Still, they shouldn’t take their readiness for granted. “Overnight batch processes and manual efforts may not be acceptable in the new environment where firms will have less than one day to fix any breaks or reconcile any issues [with counterparties],” says Freeman.

The starting date for the mandatory T+2 settlement cycle for European equities set voluntarily by ten European markets — including France, Belgium, the Netherlands and Finland — precedes the launch of the European Central Bank’s Target2 Securities platform. Target2 will consolidate the settlement activities of over two dozen European depositories onto a single operating system. The International Capital Market Association (ICMA), the trade group representing the Eurobond market, has also announced that Eurobonds — which are typically settled at international securities depositories Euroclear Bank and Clearstream– will be required to face a two-day settlement cycle.

The ECB had mandated that European countries, many of which now run on a three-day settlement cycle, shorten that timetable to T+2 by the end of 2015 at the latest. T2S is set to go live in four waves between June 2015 and February 2017 with the three local European depositories operated by Euroclear in Belgium, France and the Netherlands connecting to T2S in the second wave in March 2016. Euroclear Finland will migrate its settlement operations to T+2 in the final wave in February 2017.

As buy and sell-side firms in the ten countries scramble to accommodate a potentially grueling-double duty settlement timetable on October 8, one nation is avoiding the fray. Historically known for its cumbersome share registration procedures, Spain’s central securities depository Iberclear has opted to delay its starting date for T+2 for Spanish equities to November 2015 to accommodate changes to its securities law this year.