The impact of upcoming regulation on asset servicing will be substantial.
In addition to new rules tackling Environmental, Social, Governance (ESG) investing, digital assets and shareholder engagement, there is a growing global regulatory push towards achieving shorter settlement cycles. With T+1 fully operational in India, and the US and Canada due to introduce it from 2024, Laurensy said he expected the EU to follow within the next two to three years.
Although T+1 could help reduce settlement risk and free up collateral, Laurensy told the TNF that its adoption is likely to cause issues across the EU. “The big question in the EU is whether each member state will be willing to introduce the changes at exactly the same time,” said Laurensy.
To avoid a fragmented implementation of T+1 across the EU will require all of the member states’ Financial Market Infrastructures (FMIs) to engage with each other on the subject.
There are other issues facing T+1 as well.
For investors trading EU securities out of distant time-zones, T+1 (and eventually T+0) could force them to pre-fund their FX transactions. A shorter settlement cycle also increases the risk that more trades and securities lending/borrowing transactions will fail, leading to financial institutions incurring heavy Central Securities Depositories Regulation (CSDR) fines.
In the case of asset servicers, activities such as corporate action processing and cross-border Exchange Traded Fund (ETF) settlement could face disruption too because of T+1. If T+1 is to be handled effectively, asset servicers will need to automate their core operations. “The industry’s current operating model is not adapted for this shortened settlement cycle,” said Laurensy.