Global Custodian Clearing and Settlement Issue 2018 | Page 19

[ M A R K E T and needed more time to adjust. In part, the mixed pace in Asia has to do with the lack of a strong driver. While it is widely agreed that T+2 is better than T+3 from a risk perspective, no one is screaming for the transition. Investors won’t often shun a market because it has a long settlement cycle. T+2 is instead an industry-driven best practice that pro- vides marginal benefits in terms of capital liberated and risk lowered. “Investors are not overly clamouring for it,” says Gary O’Brien, head of custody product, APAC at BNP Paribas Securities Services. “Some pressure does come from the service providers. The length of the settlement cycle is factored into their risk R E V I E W calculations. If you bought something, you want it now.” Modernisation requirements To a certain extent, the movement to T+2 is just one of many upgrades required of a modern exchange. It is a single step in a larger, ongoing process. While T+2 may grab headlines, it is no more important than the other incremental improvements required. SGX has been approaching the task in a holistic manner that reflects this thinking, mixing in faster settlement with a number of additional reforms that are part of a longer-term evolution process. Its Post-Trade System (PTS) upgrades started in 2012, with Phase I finishing in | S E T T L E M E N T C Y C L E S ] 2016 and Phase II now underway. In its late 2017 consultation on upgrad- ing to T+2, the SGX touched on a number of improvements that it hoped to under- take at the same time. Importantly, the exchange wanted to take the settlement process from a delivery versus payment (DVP) model, where securities and cash move at different times, to where they move simultaneously and in a conditional manner. Because of this, the rules will be amended so that the Central Depository (CDP) will not take delivery of securities unless payment can be met, and it will no longer require a bank guarantee to pro- tect itself in case of payment or delivery failure, ultimately removing risk from the Summer 2018 globalcustodian.com 19