Significant changes to market structure tend to fuel technological innovation which enables market participants to handle those changes. Cloud-hosted SaaS technology is now recognised as an enabler for market participants to access liquidity, pricing, risk, and settlement to deal with these changes. Tech providers such as Integral are instrumental in assisting businesses through their SaaS offering.
The introduction of T+1 for US securities settlement is one example of how cloud can play a role in making this transition much smoother. With the start date for T+1 settlement less than a year away, there are multiple elements that need to be considered. For market participants in Europe and Asia sourcing the required currency via FX trades in order to purchase securities is a key consideration. Firms will be up against it under T+1 to match their equity trades and execute the FX trade required to source dollars, to be able settle to the equity trades in time.
Take a UK fund manager buying 10,000 shares of Apple at $200 dollars per share. Buying these shares would cost a fund manager $2 million dollars. If the fund manager wants to buy the shares, they will need to deliver the full amount of money on T+1 – otherwise the trade will fail. Perhaps the fund manager finds themselves in a situation where, once they account for all the various commissions, the overall number is $2,010,000.56. Therefore, to get an accurate net price to the cent, the fund manager needs confirmation of the trade from the back-office as quickly as possible, to then carry out the GBP/USD trade to make sure that the equity trade can settle in time.
This not atypical trading situation gets to the heart of the challenges firms face around T+1. Nothing changes in terms of how a trade settles, it is simply that firms have a much shorter amount of time to play with. It is no longer possible to wait an entire day to figure out what the final number is – everything needs to be completed a day earlier. Any non-US fund managers operate in their local currency, not dollars. Therefore, they will need to carry out the trade by converting sterling into the precise amount of dollars they need to deliver not just on Apple, but all their US cash equity trades. Essentially, this significantly compresses the timeframe in terms of how quickly a fund manager needs to get hold of dollars to complete what could be numerous US cash equities trades, all while ensuring the settlements have taken place within the day.
The only solution to this predicament is much tighter integration between the equity and FX trading systems. As soon as the back-office has confirmed the US cash equities trade, this information needs to flow seamlessly to the FX trading systems with no room for errors. There is simply not enough time for manual intervention in the world of T+1. This is where cloud comes in. To achieve this level of automation, cloud technology can easily automate equity and FX workflows to help meet the shorter settlement requirements in a timely and efficient manner. With less than a year to go, firms will need to lean on their tech providers to give them the agility and flexibility of cloud-based technology, as this is the only way they can get a faster time to market and be cloud and clear in time for T+1.