As Europe moves to a more standardized system of T+2 settlement, in a bid to create harmonization between European Union member countries’ business operations, Tony Freeman, executive director of industry relations at operations expert Omgeo, tells Euromoney why a move to T+2 will have solely positive consequences. He also gives reasons why arguments against the change in processing are flawed.
“There are three main gains in a move to T+2 settlement,” says Freeman. “Post-Lehman it was seen that three-day credit exposure was dangerous and therefore T+2 settlement would set the limit of this possible exposure to two days. Also, mandatory T+2 settlement harmonizes the procedure throughout the EU, which is necessary for the implementation of TARGET2-Securities – the IT platform for European equity and bond settlement – which is scheduled to go live in 2014.”
Finally, there is what Freeman calls the “carrot-and-stick approach”.
He says: “T+2 settlement requires a higher degree of automation in process, which has benefits of efficiency and leads to a reduction in the level of failed trades.”
T+2 settlement indicates that it will take two days from the transaction date for the trade to finish settlement, which is currently considered standard practice in some EU member states. However, many EU countries still adhere to a T+3 settlement window. With the implementation of T+2 standardization , this would move all members of the EU to a standardized settlement date and therefore harmonize the European financial trading process.
Although the reform is seen to be a generally positive step in harmonizing Europe, there have been a number of objections from the financial community.
It has been suggested that a move to T+2 actually led to an increase in the number of failed trades by forcing people to work to an unfamiliar timetable. Freeman, however, finds such an argument unconvincing.
“The deadline for the move to T+2 is likely to be Q3 2013 – slightly before the deadline for T2S – this gives people two years to become familiar with the process,” he says. “The issues are all known and understood, and can be dealt with by this deadline.”
The other objection often raised is the cost of the automation that is necessary to operate on a T+2 schedule. However, Freeman argues that this fails to take note of the fact that most of the market has already recognized the benefits of automation although there are still areas of the market without the necessary level of automation, primarily on the buy side.
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