The upcoming U.S. T+1 settlement cycle has a significant impact on markets in Asia due to its time zone difference with the West. In the current T+2 cycle, Asia-based firms transacting in the U.S. and in Europe lose a day and a compressed settlement cycle only further reduces their time to act.

A shortened settlement date therefore raises key questions around trade cut off times, trade affirmations, the timing of foreign exchange, and how firms will manage unmatched trades during the U.S. hours of T+1 without coverage for U.S. market hours.

Here’s what asset managers and banks in the region should consider:

How will shortened cut off times affect firms in Asia?

In T+1, the cut-off date for instructions will be one day earlier creating a tight timeframe for markets in Asia.

Under the current cycle, asset managers in the U.S. and Europe send trade settlement instructions to custodians directly. However, under Japan’s unique market structure, asset managers first provide the information to the trust bank on behalf of the pension or mutual fund (unless they adopt solutions that allow them to send settlement instructions directly to their custodian), which passes it to the trust bank for validation in parallel.

While asset managers can currently send instructions by T+1, the T+1 shortened cycle requires they be prepared on trade date, or in the early morning of T+1 (local time).

How will mandatory trade affirmations affect cut off times?

Many asset managers and banks in the region are assessing if they must follow a trade affirmation process. In Japan, for example, trade affirmations will need all instructions prepared by 7 a.m. on T+1 (local time). This is impossible to do on a T+1 cycle (as they would have to get up at 5 a.m.) so, they are planning to send trade instructions post execution on the evening of T date.

Some firms have already decided to opt for a non-affirmation process which carries a later cut off time than for the affirmation process. However, for U.S. brokerage subsidiaries of Asia-based asset managers and banks, trade affirmations are mandatory.

Most participants understand that as more markets introduce T+1 and regulators intend to introduce mandatory affirmations, they’ll need to accommodate it.

We are therefore in the moratorium period and building straight through processing (STP) to accommodate same day affirmations.

How will FX be impacted?

Managers need to perform the FX transaction for settlement, for their base currency (unless their currency will already be settled). For example, due to the short timeframe, the Japanese asset manager must perform the same day value FX transaction. This leads to two options: take settlement risk by doing a same day value FX transaction, or prefund, which precludes them from taking the exact amount of FX and is an inefficient use of capital.

What are the key recommendations for asset managers in Asia?

With a shortened settlement date, managers will need STP tools to facilitate communications for firms transacting on T+1. In some markets such as Japan, asset managers currently use manual processes such as sending XML files and certain instruction tools instead of SWIFT enabled messaging, which implies an additional cost.

Managers should also enhance transparency or real time information via the use of technology that enables them to see settlement mismatches or potential failures.

Real time information allows managers to focus on the problematic unmatched instructions and facilitate the necessary amendments.

Their ability to leverage these tools and technologies as they work through each downstream impact of the shortened cycle on their core processes will be key.

If you have any questions or would like further information, please reach out to Chris Pigott (chris.pigott@bbh.com), Yoshifumi Nakajima (yoshifumi.nakajima@bbh.com), or Ted Suda (ted.suda@bbh.com).