Payments within T plus 2

As far as we know, today, the European Markets will be moving to a T+2 settlement cycle by the 4th quarter in 2013. This is a precursor harmonisation, necessary for the implementation of T2S in 2015. Sounds ok, but there are masses of operational and system concerns that firms will need to satisfy, if either T+2 or T2S will be able to be any sort of success and achieve the political aims that are pushing the change. The focus of this blog is on the ability of treasury departments and payment processing in particular, to be able to allow efficient T+2 settlements.

Settlement obviously cannot be called settlement, unless the payment proceeds are ‘good value’ in the sellers account on the settlement day, [meaning the monies are accessible for use by the sellers], which in the case of T+2 will be two days after the transaction.

Technically, this would be possible now, providing processing systems are capable and payment instructions are accurate and attached to the transaction and of course that banks allowed access to funds received into the account in real-time. But is existing operational capability able to ensure that payment details are up-to-date and reconciled to the needs of the selling investor. In most firms this important activity is not always automated and has a historical track record of missing information within the payment details. Standing instructions can account for the bulk of the payments but when an instruction needs to be bespoke a spanner can be thrown into the works. These types of problems can be time consuming and expensive to resolve. With one day less to introduce a resolution there will be more expectation on operational and system performance.

The payments industry between banks is pretty efficient on a daily basis, but in T+2 we need all parties to the settlement instruction, working at increased efficiency. So will all parties to a payment be able to work one third more efficiently than today? This includes the seller’s agents; the Broker or Custodian, as well as the Clearer and CSD and the reverse for buyers looking to apply the payment asset. The answer has to be in some considerable doubt, if the number of todays failed payments and industrial problem resolution, is any guide.

All this and more will be debated in the Post Trade Forum on T2S on the 26th June,  where the industry panel will examine the future structure of European Clearing and Settlement Markets and how firms must prepare now, for the biggest change in settlements for over a generation.