When the US decides to make wholesale changes to investment markets, the rest of the world will ultimately follow. That is the way it is, the way it has been for many years with Europe, the APAC region and the rest of the world now faced with the early 2024 transition to T+1 settlement. Focusing on the APAC region, is the industry ready for the switch, and what are the implications of a slow conversion?
US markets lead, where the rest follow
As the largest global investment market in the world, it is understandable why the rest follow where the US leads. The simplicity of international trading, brought about by new technology and the Internet, has strengthened the stranglehold of the US markets on the global sector. The switch to T+1 is scheduled for early next year amid an ongoing testing process. So, what are the other challenges for the APAC region, and why has progress so far been relatively slow?
Multiple markets, multiple jurisdictions
The first thing to recognise is that one US regulator covers all US markets; hence, there is no regulatory friction. Looking at the Far East, Europe, and the rest of the world, there are numerous regulatory powerhouses, with the Far East dominated by Hong Kong, Singapore, China and Japan.
While APAC markets work well at the moment, with a (broad) standard approach to settlement, the regulatory process is a little different. To bring T+1 to the fore, there will need to be significant regulatory changes, and all parties must be singing from the same hymn book.
Data sharing
This is a crucial subject and one which is often misunderstood or overlooked. In a world of automation, having an array of set data fields and a commonly used format is essential. As we move from T+2 to T+1, literally every second will count, with a massive reduction in available settlement hours due to time constraints and time zones.
While the technology is available, getting different regulators in different countries to agree on a set format and a dataset will be challenging. However, recent commentaries on the potential challenges in the APAC region have overlooked the success of China and India.
India and China
Amidst the challenges of changing global market settlement timescales, many people have overlooked the recent successes of India and China. In China, connect security trades now settle on T+0 for securities and T+1 for cash, with traditional exchanges on T+2. So, the concept has not only been proven, even beyond T+1, but we should expect a gradual move across all Chinese markets, likely in the short to medium term.
If we look towards India, exchanges began a phased transition from T+2 to T+1 in January 2023, which, by all accounts, is proving successful. Currently, there are no significant issues, and the reduced settlement period has created greater transparency and reduced market risk for many participants.
Summary
While US markets are particularly influential on a global basis, it's important not to discount China or India, countries that have already switched part of their investment settlement process to T+1 and, in China, T+0. The reality is that all regulators, all markets and all participants need to have an appetite for change to move in the same direction at the same pace.
As D-Day for America gets ever closer, the UK and Europe are embracing change and thankfully, so are the wider participants in the APAC market. The ongoing switch and any future improvements will find more significant practical challenges than technological obstacles, with the technology already available to facilitate such change.