T+1 deep dive, part 1: Lessons learned from the U.S. rollout

[Music]

Emma Johnson: Hi. You're listening to Market Matters, our market series here on J.P. Morgan's Making Sense podcast. My name is Emma Johnson, an executive director in the EMEA Custody Product team within J.P. Morgan's Securities Services. And I'm pleased to be joined by Jack Parker, an executive director in J.P. Morgan's U.S. Custody Product, and Sahil Shah, an executive director in our APAC Custody Product team. Welcome Jack and Sahil.

Jack Parker: Thanks for having me, Emma.

Sahil Shah: Pleasure to be here, Emma.

Emma Johnson: Today, we're talking about accelerated settlements in global securities markets. This episode is part one of a two-part series and it's focused on the recent move from trade date plus two days settlements to trade date plus one day settlements in the U.S. and some of the neighboring markets. Plus, some of the lessons the industry has learned from that move. And part two, which will be released in the coming week will focus on accelerated settlement initiatives in Europe and APAC markets. So, Jack, let's start with you. Now, you were member of the U.S. T+1 industry steering group, as well as the Chair of the Association of Global Custodians Working Group for US T+1. If you could just level set and outline why the U.S. moved to T+1 settlements and why other markets are looking to do the same?

Jack Parker: Absolutely. So, markets globally have been gradually accelerating settlements over a number of years. And with the U.S., pre its move to T+1 in May, moving from a T+3 settlement market to T+2 settlement back in 2017. The underpinning rationale for sort of the accelerated settlement generally has been the desire to reduce build-up credit, operational and counter-party risk between the point-of-trade execution and settlement. So, think the discussion in the U.S. and neighboring markets, like Canada, moved to T+1 really because in 2020 and 2021, there was sort of volatility off the back of events such as the COVID outbreak and some of the meme stock events as well around that time.

Emma Johnson: Great. Thanks Jack. Thanks for setting the scene. So, we're now some four to five months post the U.S. migration to T+1. Can you just discuss how it's going so far?

Jack Parker: The industry transitions into business as usual off the back of the go-live in May pretty quickly to be honest. I'd say one of the key areas of focus or areas of success is the affirmation rate, which is a big focus of the initiatives. And in an industry level, this has been consistently higher than 90% since go-live. I think the other area of focus was obviously the settlement rate. And again, the settlement rate, that is remained high since go-live with no major spikes in fails as some predicted. I think really this is a testament to the significant focus across the region on T+1, particularly from our clients. Also, in the general custody industry and the growth industry. And then, also from the DTCC, and then, the trade associations involved such as SIFMA and the ICI.

Emma Johnson: That's great, Jack. Very interesting. So, with the U.K. and the E.U. and certain markets in Asia-Pacific exploring accelerated settlements, what would you say have been the major lessons learned?

Jack Parker: Probably the first lesson is making sure you're engaged early in the industry and regulatory discussions. So, from a J.P. Morgan perspective, in the U.S., we were engaged in the early industry working groups and reg discussions from the start. What this enabled us to do was better understand the issues. Also build up knowledge within the organization. And then, also help with our early budget planning. And I'd recommend that clients do the same from the UK, Europe and any initiatives in Asia-Pacific. Secondly, the market change this size requires early establishment of a robust execution program with formal guardrails in place. Again, this is something that we at J.P. Morgan did and would recommend our clients do the same for other T+1 initiatives as they go live across the globe. Another important point is that in the U.S. it took three to four years to actually go through this in the industry and implement it. And I think the UK, European and Asia-Pacific policymakers should recognize that. Related to that, and related to the UK and EU and Swiss policymakers in particular, the U.S., Canada, Mexico, as well as other markets like Argentina, Peru and Jamaica, they all move to T+1 at the same time because of the interlinkages between those markets. And I think, again, European policymakers need to think about that with interlinked markets in the European region. And lastly, I'd like to highlight the important role that SIFMA and the ICI command center played in the transition in the U.S. I think that command center they set up for go-live week was important for information sharing across the industry and also for engagement with the regulators over the transition week. Again, I think that's something that other trade associations globally should look to model as other T+1 initiatives transition to go-live.

Emma Johnson: Brilliant. Thank you so much, Jack. Now, Sahil, I'd like to bring you into the conversation now please. Could you maybe talk about how the U.S. transition to T+1 went from an Asia-Pacific perspective? I would imagine that timezone played a key part in your region?

Sahil Shah: So, the high-level answer across the industry would be along the lines of has gone as planned, it has gone smoothly, so far so good. As with any major market change, there is a lot of preparation, focus and attention to all of these aspects which undoubtedly help us with a successful transition. The key factor which was front and center for our clients in APAC was timing of trade affirmation. While all other clients globally had to work within a truncated window, this was critical for the APAC clients, as they had the least amount of time to allocate, confirm and affirm trades for T plus one settlement due to the time zone difference from where they operate. This was also further amplified for clients that are operating within a single Asian time zone, operational hub, versus clients that can leverage global follow the sun operational capabilities. The other key point was funding and FX timelines. Certain APAC clients, who execute their own FX trade, had to pull the FX process forward to now execute at the time of order placement with some margin or buffer in place to deal with minor differences. And on the other end, I'm also hearing of APAC clients who have moved their FX execution desk into the U.S. or are working through the U.S. time zone. Overall, I believe the clients have adapted well to the change, and we will continue to evolve processes and operations as we move towards more markets moving to T plus one, and this becoming a business as usual stage.

Emma Johnson: Thank you, Sahil, for those insights. Very interesting. And thank you both for your time. We look forward to discussing accelerated settlements in APAC and EMEA in part two.

Jack Parker: Thanks so much for having us.

Sahil Shah: Thanks for having us and we look forward to continuing this conversation.

Voiceover: Thanks for listening to Market Matters. If you've enjoyed this conversation, we hope you'll review, rate and subscribe to J.P. Morgan's Making Sense to stay on top of the latest industry news and trends. Available on Apple Podcast, Spotify, Google Podcast, and YouTube. This podcast is intended for institutional clients only. The views expressed in this podcast may not necessarily reflect the views of JPMorgan Chase & Co., and its affiliates, together J.P. Morgan, and do not constitute research or recommendation advice or an offer or a solicitation to buy or sell any security or financial instrument. Referenced products and services in this podcast may not be suitable for you, and may not be available in all jurisdictions. J.P. Morgan may make markets and trade as principal in securities and other asset classes and financial products that may have been discussed. For additional disclaimers and regulatory disclosures, please visit www.jpmorgan.com/disclosures.

© 2024 JPMorgan Chase & Company. All rights reserved.

[End of episode]