T+1: Acceleration Doesn't Erase Systemic Risk
The global financial market's shift to T+1 settlement, reducing the time between a trade and its settlement to one business day, is often framed as an inevitable march toward efficiency. While the promise of enhanced liquidity and reduced counterparty risk for individual transactions is appealing, a deeper, more critical examination reveals a complex reality. Faster settlement does not automatically eliminate systemic risk; it merely transforms it, potentially introducing new vulnerabilities.
The Drive Towards T+1
The transition to T+1 aims to compress the settlement cycle, following the lead of the North American markets. This move is intended to align global practices and improve capital efficiency. In France, the financial market authority, the AMF, has diligently explored the implications, publishing a thematic dossier dedicated to this transition [1]. Their work underscores the multifaceted nature of this change, extending far beyond a simple reduction in time.
Risk: Transformed, Not Vanished
The core assumption that a shorter settlement cycle inherently reduces risk warrants scrutiny. While a quicker settlement limits exposure to market fluctuations and defaults over an extended period, it drastically compresses the operational window for all involved parties. This includes confirmation, allocation, and funding.
This compression can introduce significant operational risk. Errors, delays, or system failures, previously manageable within a T+2 or T+3 cycle, could now cascade rapidly, impacting multiple market participants before remediation is possible. The pressure to complete complex, cross-border transactions within tighter deadlines raises the probability of failures, particularly for less automated processes.
France's Proactive Stance on Interconnectedness
French regulators are not approaching this transition with blind optimism. Recognizing the inherent interconnectedness of the financial system, the Banque de France, ACPR, and the AMF have initiated stress tests specifically designed to assess the resilience of these interconnections [2]. This proactive approach acknowledges that systemic risk is not merely an aggregation of individual risks but a function of how failures propagate through the system.
This foresight is critical. A single point of failure, whether operational or liquidity-related, can trigger a chain reaction, especially within an accelerated settlement environment. The stress tests aim to identify these weak links before a crisis unfolds, a pragmatic necessity in a rapidly evolving market.
New Vulnerabilities Emerge
The shift to T+1 introduces specific challenges:
- Foreign Exchange (FX) Risk: A significant portion of cross-border securities transactions requires FX conversions. The compressed timeline dramatically shortens the window for matching and settling FX legs, increasing the potential for settlement fails and liquidity strain, especially for non-USD currencies.
- Liquidity Management: Firms must ensure they have sufficient cash and securities available much faster. This can strain liquidity buffers and potentially lead to an increase in intraday borrowing, impacting overall funding costs and market stability.
- Operational Resiliency: The need for near real-time processing and communication across a fragmented global market demands robust, highly automated systems. Any disruption, from cyberattacks to human error, could have amplified consequences due to the lack of buffer time.
The AMF's comprehensive analysis highlights these challenges, advocating for careful preparation and robust infrastructure to mitigate the risks associated with this acceleration [1].
Vigilance Over Unwarranted Optimism
Flowtly's position is clear: market evolution demands pragmatism, not just speed. The move to T+1 is a significant structural change. While it offers undeniable efficiencies, the underlying assumption that it inherently reduces overall risk is simplistic. Instead, it reconfigures the risk landscape, emphasizing operational integrity and the resilience of market infrastructure.
Regulators and market participants must maintain heightened vigilance. The focus should not solely be on achieving T+1, but on ensuring the market's enduring stability and robustness within this accelerated framework. Systemic risk does not disappear with speed; it simply requires a more sophisticated, anticipatory approach.
Key Takeaways
- T+1 shifts, does not eliminate, systemic risk: Faster settlement introduces new operational and liquidity challenges.
- Operational resilience is paramount: Compressed timelines amplify the impact of errors or system failures.
- French regulators are proactive: Stress tests address the interconnections and potential for systemic shock.
- New vulnerabilities: FX settlement and liquidity management require careful attention under T+1.
- Vigilance is crucial: The market must prioritize stability and robustness alongside efficiency.
