Series 7 Episode 1: The countdown to T+1 accelerated settlement

Transcript

Tessa Norman: Welcome to this episode of Risk & Regulation Rundown, the podcast where we share our views on financial services, risk and regulatory hot topics. Today, we're going to explore a transformative shift in financial markets that should be on everyone's radar, T+1 settlement reform. T+1 reform represents a major change in the way that trades are processed and settled, which has significant implications for band systems, processes and workforces. We're joined today by two expert guests who are extremely well placed to help us unpack all these implications and talk us through the steps that firms need to take to prepare. I'm delighted to welcome Andrew Douglas, who's Chair of the UK Accelerator Settlement Taskforce and is leading the UK's efforts to transition to T+1. And I'm also joined by Menicos Kouvaros who's a Partner in our Financial Services, Risk and Regulatory practice, and he’s leading T+1 settlement for PwC. Welcome to the podcast.

Andrew Douglas: Thanks for the invitation, Tessa.

Menicos Kouvaros: Thanks Tessa. Great to be here.

Tessa: I'm going to kick off with just a little bit of context and a brief explainer for our listeners, particularly for anyone who may not have been following this topic closely. T+1 reform will require in scope financial instruments to be settled by the end of the day after they've been traded, which is half the time of the current settlement period for most securities. The transition has already taken place in North America in May 2024, while the UK and the EU are due to move to T+1 by 11th October 2027. And in the UK, there's been a growing focus on the transition over the past few months with the taskforce recently publishing its final recommendations. Andrew, it'll be great to start off with your thoughts on why T+1 is such a significant change and what are the key messages that you're looking to communicate the market ahead of the UK's transition.

Andrew: Thank you. And personally, I'm just going to correct you on something that you've said there. You said it's half the time, and that's what it sounds like moving from T2 to T1, but it's the half the time but with someone with a much bigger brain than myself has calculated a shift from T+2 to T+1, you lose 83% of the time that is currently available for correcting errors. As you said, this is something that people should be focused on because it's not as easy as simply saying, 'Oh, I've got one day.' You will have less than one day. So why are we doing this? The trite answer is that the US moved to T+1 and we have seen that it can be painful where there is cross border investment, where there is assets which are settled as part of investment funds in the UK that could be based either in Europe or in the US, this causes a degree of operational and financial pain and that is something that we are keen to avoid.

Once the US, the single biggest market globally and the single largest external investment destination for UK investors, once they have decided to make that move then it really gave us no choice other than to assess the value of our own movement and we will be able to derive the benefits that we have seen in the US already, the reduction in capital, the increases in efficiency, although I'm sure we'll talk about that a little more. The ability to increase the velocity of investment and the implications that that has for relieving yourself of risk in times of crisis. There is also the reduction in counterparty risk. The whole range of benefits that were identified for the US, they will also apply here in the UK. I have an additional benefit, which depending on who I'm talking to, whether this is a popular thing for me to say, and that is I've spent 35 years working in the back-office of financial infrastructures and banks and I know that the back-office is not traditionally shall we say, the part of any financial institution that attracts huge amounts of investment. It tends to be a little bit more of the nature of what do we need to change in order to get that? Someone once said to me in relation to something else, 'I only want a passing grade here. I want a C, I don't want an A.' And that is to me, part of the philosophy around investment in the post-trade space.

We find ourselves with a situation where the back-office generally, yes, it’s effective, it works today but is it good enough for us to be able to make the leap into the future? Whether that's T+1 or T0, which I'm sure we'll touch on later and I think most people would be in agreement that generally, we market participants are not in a position where we would be able to move to a T+1 or a T0 environment without some substantial investment. What I see this as being an opportunity for, I hope people will welcome this opportunity and grasp it very firmly, it's an opportunity to think about how you do this business and maybe you need to re-engineer the back-office process and include automation. That is probably at the end of this podcast, if I haven't said automation 10,000 times, then I'm not doing my job properly, but that to me is the key for this. It is how you look at what you do today, and how you work out how you're going to make that more efficient, more effective, and for me the main way of doing that is to automate processes.

Tessa: Really interesting, thank you. Menicos, from the conversations that you're having with clients at the moment, to what extent are firms reflecting on some of those points that Andrew's talked about in terms of transformation and automation and how do you see the transition impacting firms?

Menicos: It's definitely gathering focus in terms of people engaging with the topic in particular, I'd say, in the last month or ever since you fired the starting gun, as it were in February. It does vary depending on the firm and where they play in the execution to settlement chain, but broadly I'd say that there are three areas that firms are focused on when you group things up. The first is on clients. 'How's this going to impact my clients? What do I need to do about client education, documentation, change in behaviours and so forth?' The second is, the internal aspect of that and 'What do I need to do from a system uplift perspective, automation of processes and controls?' As well as 'How is this going to impact my risk management activities, what do I need to think about from a funding and liquidity perspective, what I need to do from a workforce perspective?' And I think the last category where people are focused is third parties and recognising that over and above all the internal change, they are reliant on a series of other firms and components of the market infrastructure to be able to successfully service their clients on how they're going to stay on top of where all the third parties they rely on are, such that when we get to 11th October in 2027, they're comfortable and confident that they can service their clients.

Tessa: Given those three key areas that you've talked about and, of course, we're working towards the deadline of October 2027, what do you see across the market at the moment in terms of level of readiness? And how much reliance are firms placing on their North American transition readiness?

Menicos: I think it's fair to say it's early days. I have engaged with some firms that are much further ahead than I had anticipated at this point in time and that's great to see, but generally speaking the leading firms that I've spoken to, they've identified sponsors, there are change programmes, they are beginning to mobilise those programmes to start on their impact assessments, but they are at the beginning of that journey, albeit picking up momentum. That obviously differs when I talk to my European colleagues in terms of countries and market segments and I think that's going to be path of a course when we think across the whole landscape here, but that's broadly where the firms are. A lot more engagement over the past month, both in terms of us speaking to firms but also firms proactively contacting us, and in terms of US transition, it's fair to say that people are looking to the playbooks and the programme governance setups that they had for US transition and say, 'How do we repurpose that for what's going to happen?' Some firms did build in the system functionality to accommodate T+1 settlement in the UK and Europe when they were doing the system upgrades for the US, but I'd say a shifting view of firms saying, 'Well, we did the US, it went fine. It's not going to be a big lift for us.' To the same firms saying, 'Actually, hang on a second, we're going to go live across with the UK and Switzerland, 29 markets at once, 32 or so CSDs across all those market participants, 'This is going to be another level of complexity in terms of how we need to navigate this.' I think people are coming to terms with there's only so far that the US transition work and preparation can take them and that they need to have a fresh look at how this impacts their operations.

Andrew: If I can just make some comments on that. I used a statistic when we had our kick-off event, the firing of a starting gun you mentioned Menicos, on the 20th of February. One of the statistics that I used there was we are in the process of finalising a poll survey to give us a baseline as to where the UK market is and at that time, towards the end of February, basically a month ago, we had approximately 51% of folks said that they had started, 49% said they hadn't. Now starting might mean I've downloaded the report, and I've started reading it, or it might mean, I'm part way through a re-design or I am implementing automation. What I'm hoping is that folks will be erring towards the latter rather than the former, getting down the journey. One of the things that I would say in relation to people, organisations that feel I went through the US move, now I've got to go through the UK move, there is a similarity between those two and that is, they both begin with the letter U. After that, they're different. For example, in the UK we're looking at how you automate the use of PSET. We've been looking at how you automate or use more broadly the partial settlement facility. Neither of those two things were relevant in the US. The US had affirmations. We don't use affirmations. I'm afraid the similarity starts with United and ends with United. One's Kingdom, one's States.

If you want to be successful in the UK move, and then we've got the added complexity of Europe going at the same time, if you want to be successful in October 2027, please do not take anything for granted. You have to do the hard yards; you have to do the work to find out what it is you will need to do. You cannot, and I would caution people, that's it very dangerous to assume that 'I did okay in the US move, therefore I'm going to do okay in the UK, Europe, Switzerland move.' Please do the research. My biggest enemy, and there's the classical question, 'What keeps you awake at night?' The thing that keeps me awake at night is complacency. The potential for complacency. Organisations saying, 'I did the US, I probably haven't got much to do. So, I'll wait until '27.' Don't, and I will simply paraphrase what Mark Francis from the FCA said at our event. He said, 'In 2025, you need to read the report, you need to plan what you're going to do, and you need to budget, secure the budget so that in 2026 you can implement the changes that you will need to do.' Don't wait until '26 and think, 'Oh, I'll get the cash then and I'll do it all in '27.' Not a recipe for success.

Menicos: And in fact, we’ve talked about this before, but the plan that the taskforce published. There was a reference in that that you'd mentioned to me beforehand. There's a reference in that to a survey that was done around US transition, and that survey indicates that when you look at how that went, there were 35% of firms during the US transition still had some form of work to do at the point when that transition went live.

Andrew: Because these figures, I have a statistic for everything, but these figures are engrained in my head. One of them is that three months before go live in the US, there were a bunch of automation projects that had been identified as necessary and 75% of those projects had a deadline after the US had gone live, which isn't terribly helpful, and breaking news as we sit here today having this conversation at the end of March, 25% of those projects have still not gone live and we're not far away from being a year down the track. All these things say to me, 'Don't underestimate the amount of work that needs to be done for this project.' I mean, the other frightening statistic which I hope people will find frightening is that a survey of, I think it was 350 firms, revealed that post go live, back-office costs, people costs had risen by between 16% and 18%. That's not sustainable in the long-term and anecdotally that is because people have not either considered automation or have not completed their automation programmes. So, they threw people at it. I've thought long and hard about saying what I'm about to say next, but I will say it, and that is, you will get over the line in October '27 by throwing people at it. I would suggest that by October '28you may be struggling, if not before, if you're relying on people to do this work. It simply is not a long-term solution for success.

Menicos: Yes, and you can see in that data that stratified by the type of firm and the amount of automation those categories had, there is a correlation between the increasing staffing versus the amount of automation that went in and the firms that hadn't invested, ended up with a lot of extra ongoing staff expense.

Andrew: Me and the taskforce recognise that there's a whole proportionality concept here, which is some firms simply don't have the financial resources to carry out these re-engineering and massive automation programmes. You talked a little bit earlier Menicos, about third parties. Where it says automate, doesn't mean you have to automate. What it means is your process needs to have been automated and that could be through the use of third parties, as an example.

Tessa: Brilliant, thank you both. Some quite stark lessons there from the US, and we've talked about the various impacts on firms. Menicos, do you have a sense at this stage of where you expect there to be the greatest areas of challenge or pain points for firms?

Menicos: Yes. it's interesting. As I and my fellow partners across Europe are talking to clients, there are a number of topics that keep coming up as what's on the radar right now and maybe that is where we'll coalesce and the technical working groups will pick up and maybe Andrew they'll be others that you can add to the compliment to the list, but education and behaviours front of mind, SSIs and client allocations, FX and basically the mismatch in FX settlement timelines and what the implications of that and is it a big deal or not? Based on what happened in the States. Stock lending recalls and returns, workforce coverage and particularly how you deal with Asian clients. Readiness reporting and metrics. What reporting are you going to get from your third parties? From your CSDs and how do you plot the path to being ready? Industry testing interestingly. A lot of positivity about the industry testing in the US and people reflecting on the fact that the UK combined with all the other markets is such a complicated change that that seems to be important. And most recently actually, resilience of CSDs and particularly spurned by the T2S outage in February, that's come front of mind as part of that thought process about how resilient are my third parties and how much can I rely on them? But those are some of the key topics that are coming up in conversations where we're having those in workshops with clients and sticking points and people are looking to the technical work streams to try and shed some light. It takes some thought, but how do you reflect on those, Andrew? Do those make sense?

Andrew: They do, and I am hearing very similar. Very similar comments, which is encouraging. People are being consistent. So, the obvious ones, the obvious processes that are being highlighted as occupying a lot of mind time and how do we resolve them to stop lending is a clear one. Particularly the automation and the stock recall process. The whole FX/funding issue for accounts is also occupying a lot of mind time. You talked about readiness reporting, this is something which is very front of mind for me because I have a commitment that on a quarterly basis, I will review market progress with the public authorities, with Treasury, with FCA and with the Bank of England. It is important for me to work out ways in which I can get a handle on where the market is, and that's partly why we have just started, I think I talked about it earlier, the pulse surveys. The same organisation that did them in the US, the ValueExchange, they're doing them for us. They'll be doing them on a quarterly basis, we'll try to avoid survey fatigue in this. We've just completed the first one, and I think we had over 460 responses to it. It was reasonable sample of market, the market views. And one of the questions there was one of the pain points, and all the stuff that you've talked about, Menicos, was highlighted there and some other stuff because people were really getting down, starting to get down into the nitty-gritty.

One of the things that I'm very focused on now, and I put this down to things like, we talked a little bit earlier about the use of PSET and partial settlements not being part of the US move and those unique aspects to the European way of working, because they're not necessarily unique to the UK. And again, I'm sure we'll talk about that later when we talk about the work that we're doing with our European colleagues, but these are things that didn't have to be thought about before. Interestingly, some of these, they're not technical changes which again is why I encourage people to think about, 'What can I start doing now?' Some of these are behavioural changes. For example, partial settlements, you can do that today. The functionality in Crest is there. It's the analogy I always use with these things because I'm old enough to remember video recorders.

Menicos: You're not the only one.

Andrew: But if you remember with video recorders, you'd get a manual that's about six inches thick. You only ever use the first two pages, how to play, how to rewind and how to record. All the rest of the magic that it could do, you never paid any attention to, and it's like that with settlement. The use of partial settlement, that is in the section of the manual marked how to record a programme while you're out? Which we never got to, and I was talking to someone yesterday and they said, 'Oh, yes, I remember that.' We used to plan what time we would go out based on whether we could start the video recorder before we left, and they'd be another tape on it to capture what we needed. What I don't want is for people to be planning their settlement operations around, 'Well, what time can we leave it until we press the button because we didn't automate it properly?' So, yes, encouragingly, a lot of the issues that you highlighted there, in fact, all the issues that you highlighted there are critical pain points that we would look to be addressing, testing, as you said Menicos, is something which more and more people are raising and more and more people want to get their heads around, 'What is the testing programme?' We will be making those, once we understand what people have got to do and when people will be available for testing. I'm working with Crest now and we're trying to come up with a pro-forma testing plan, but I would imagine that we will be spending a lot of 2027 offering those testing facilities. Again, the simple reason that when talking about not just the UK going at that time. We're talking about Europe and Switzerland at the same time, and I think even if people just want to test that I can get my instruction to Crest by 9:00 pm on T. People will need that confidence, and we need to be able to provide that to them.

Tessa: I think it would be a good time now Andrew; to talk a little bit more about that engagement with the EU and yes, it'll be interesting to hear your reflections on how you're working with equivalent bodies in the EU.

Andrew: Yes, in fact Menicos and I were talking about this on the way up to the studio, and that is from a taskforce perspective, in the UK, we've always operated on three principals. One is inclusivity, so everybody has the ability to join. One is the independence of the group which is no one category gets more say than others and the final part, which is relevant to the European relationship is transparency. We've done everything in the open air. We've shared with Europe, because it was clear that Europe was making its own decision to move to T+1. So, we were transparent. We've had EACH, ECSDA and EFAMA as three major constituencies in the post trade space. We've had them as observers to our taskforce meetings. They've seen all the documents, they've been party to all of the conversations that we've had and the conclusions that we've reached and in a reciprocal fashion, I'm now invited to be an observer on the European taskforce meetings, and Giovanni is now also an observer once he had been appointed, we invited him to be an observer. He and I speak on a regular basis anyway, outside of the taskforce framework because this isn't about winners and losers, this is about us all executing flawlessly at the same time because it won't help us if Europe doesn't make the deadline in the same way that it won't help Europe if we don't make the deadline.

There's a mutual reliance here, particularly when you start talking about things like ETFs, where the linkage between the UK and the European Union for ETFs is huge and if there is a misalignment in the settlement cycles for the underlying assets in the ETF, then it's a massive problem for the asset management community. So, as I said, there's only losers if one or the other doesn't make this and so Giovanni and I are working very hard to try and make sure that we are aligned. What I am hopeful is that with the work that we've done, if you look at the recommendations that we've made, some of them are UK specific. So the time at which you submit your instructions to Crest, that's a UK specific recommendation, but automate the stop loan recall process, that's not a UK specific recommendation. Automate call productions processing, that's not a UK specific recommendation. What I’m hopeful is that because we did focus on making these recommendations agnostic as to jurisdiction, what I'm hopeful is that we will see some transfer of the recommendations we've made in the UK to the European solution, which will allow them to focus on the issues that we don't have in the UK. So, we have one CSD, Europe doesn't. We have two or three CCPs, Europe has many more and these are issues which they will lead to expend some serious mind time to create solutions for that. And hopefully this symbiotic approach will allow our European colleagues to focus on the European specific issues.

Tessa: Menicos, are there any further points you'd add to that in terms of UK and EU alignment? I know you've been working with our PwC colleagues in the EU on this.

Menicos: Yes, first, all credit to Andrew in terms of the tone setting for that collaboration that we are seeing, and when you fired that starting gun, Giovanni was there. It's very refreshing that we're all on the - I wouldn’t say same side of the problem - but we're all working together. I certainly feel about that internally too. The alignment also helps the firms in the marketplace, because this is complex enough as it is without that lack of coordination, or divergence. I think that's fantastic. Yes, internally, Tessa, we have a European working group, the leads from each of the markets are involved in that. We're aligned to the respective technical work streams. We share what we're seeing, and hearing from our client conversations, which means that when we're talking to clients it's a much richer conversation. Not to mention that we have a lot of international clients and being able to service them collectively in all the markets that they are based in is important, and something that I think those clients should expect, of course. So, like I said, I think it's great, and all credit to Andrew, and no doubt Giovanni's reciprocal leadership.

Andrew: For me that aspect that is slightly off topic, I guess, but it's been very gratifying, just to prove that it's like the old joke, 'I'm putting the band back together.' That the UK and the EU can work together. So, what I'm hopeful is that in some small way we contribute to a better working relationship in the future between the UK and its, what I would call nearest and dearest partners, the EU.

Tessa: Brilliant. That's a really positive note to end on as we bring our conversation to close. Before we wrap up, I'd like to ask you both for a final key message for our listeners, that you're really like our listeners to take away and focus on as they're approaching this work. Andrew, I'll come to you first.

Andrew: I've got two. The first one is complacency. Avoid complacency. Do not, as we talked about, and I read somewhere a quote from somebody the other day which said, 'At the point at which you feel you're becoming repetitive, that's the point at which people start to listen.' So, what you will hear is these two points time and time again if you're unfortunate enough to attend an event at which I'm speaking. Two things, (1) avoid complacency, and (2) increase your automation. Those are the two messages that I want people to take away any time they hear me.

Tessa: Brilliant. Menicos, what would your takeaway be?

Menicos: I have three, but two of them are the same. The first was you can't afford to be complacent, and we've talked a bit about why. The second is you need to be, and firms need to be focusing on this now. And as we've mentioned, for regulated firms the regulators as part of their supervisory conversations will be asking, 'Have you started assessing the impacts to your business?' and, 'Have you budgeted for the change that you're going to need to make?' So, there are clear regulatory expectations. The third, to echo the point made by Andrew, is investment in automation, and that's critical to keeping fail rates down, and keeping costs stable, which is the ballgame.

Tessa: Brilliant. So, lots of firms to do, but I think lots of benefits there as you've both articulated. So, thank you both so much for joining us, and for sharing your insights. I think there have been lots of practical takeaways for firms there. So, thank you so much. To our listeners, I really hope you've enjoyed this conversation and thank you very much for listening. Please subscribe for future episodes, and please rate and review this series as it helps other listeners to find us. If you'd like to hear more from us on T+1 reform, as well as other risk and regulatory topics, please look out for our regular publications on our website which we'll link to in the show notes. Look forward to speaking with again next episode.