Speaking to InvestorDaily, Omgeo executive director of industry relations Tony Freeman said Europe is set to move to a T+2 settlement cycle from 1 January 2015 for ‘harmonisation’ reasons.
The US is moving in a similar direction, and many Asian markets have made the move already, he said.
“There’s an awful lot of behavioural change that needs to happen to get to T+2. [The ASX] has just started thinking about this but has no plans to move,” said Mr Freeman.
A committee within the Australian Securities Exchange currently has the issue “on its radar”, he said.
There is a global trend towards shorter settlement times, said Mr Freeman: “If you ask people, ‘Why does it take three days to settle a trade in an equity?’ nobody can give you a good answer,” he said, adding that in fact, the answer to the question is usually ‘That’s what we’ve always done’.”
“Imagine if you went on Qantas.com and put in an order for a seat on a flight and you had to wait for three days to know for sure whether you’d got it or not, you’d think it was totally unacceptable.
“It’s really a historical anomaly that it takes three days [to settle a trade]. With proper use of technology it shouldn’t take three days at all,” he said.
Fund managers can be adversely affected by varying settlement times, he continued.
“[They] don’t like discordant settlement cycles – they like to be able to sell out of one market and invest into another one on the same cycle.
“If you’re selling in a T+3 market and buying in a T+2 market you’ve got a day’s funding to find from somewhere,” he said.
As a result, the fund manager will have to either borrow money or hold large cash reserves, which could drag on the investment performance of the fund, said Mr Freeman.
Shorter settlement times also reduce counter-party risk for investors, he added.
“Two days’ exposure to a counter-party is better than three days’ exposure to a counter-party,” said Mr Freeman.
“Look at Lehman Brothers. A very large number of in-flight transactions didn’t settle when Lehman collapsed … Nobody knew which entity had what money and who they were exposed to – it was chaotic.”
