WHILE THE MOVE BY THE UNITED STATES in September to shorten the time it takes to settle stocks and bond trades by one-third didn’t receive much fanfare outside of the financial industry, it was a significant milestone that directly benefits individual and institutional investors here in Asia and globally.

By shortening its settlement cycle for stocks and bonds from three days to two days, known as T+2, the US has substantially reduced operational and counterparty risk across the industry, allowed investors to receive their cash faster and aligned its settlement cycle with other major markets across the globe.

Cutting the time between when a trade is executed and when the buyer must make payment, and the seller must deliver the security, has been a key industry focus in recent years because of its ability to make markets safer and more reliable.

This is because it reduces the time that a person or an institution on one side of a trade is exposed to the risk of the other side to trade defaulting, such as in a Lehmann’s type scenario.

T+2 has largely become the settlement standard.

Shorter settlement cycles also mean investors benefit from greater market efficiency since funds from selling assets are freed up faster for reinvestment, as well as advantages of reduced credit exposure. Meanwhile, buyers of assets gain quicker access to securities following trade execution. At the market level, a shortened settlement cycle frees up capital across the industry, lowering margin and liquidity needs which is important in times of volatility.

Asian markets have also been focused on shortening their settlement cycles. Hong Kong transitioned to T+2 in 2011, while Australia, New Zealand and Vietnam transitioned from T+3 to T+2 in early 2016. China boasts a T+0 settlement cycle. Singapore is planning to move to T+2 and markets like Japan also appear to be on track to move from T+3 to T+2 in the future, as well. Most EU markets moved to T+2 in late 2014.

For firms in Asia, harmonization of settlement cycles across the region and with the US and EU enables greater consistency in post trade practices, helps aligns cash flows and simplifies processing of trades across borders.

Alignment of these cycles also encourages more cross-border capital flows. A 2014 landmark study by InsightAsia found that 30 per cent of senior operations managers interviewed in the region believed shortening settlement cycles delivers increased ability to attract foreign investment.

However, for firms in the Asia Pacific region that are unprepared for shortened settlement cycles, these changes are likely to bring forward the need for the adoption of automation and refined practices within their middle and back offices.

Following the US adoption of the T+2 settlement cycle, along with Canada and Mexico, Asian firms trading in this market now need to verify trade details and provide settlement instructions to their custodians earlier, with affirmation on T+0 highly recommended in order to allow time for management of mismatches and exceptions before T+2. Foreign exchange transactions accompanying cross-border trades also need to be performed earlier, and cash and securities handling, in general, needs to be calibrated to avoid eleventh hour shortfalls within this new compressed timeframe.

Time zone differences between the US and Asia in particular put additional pressure on firms operating in this region given limited overlap with US working hours. Until T+2 was implemented on September 5, firms in Asia had up to three full local working days to process each trade because the calendar day in Asia Pacific falls before the US. Now, under T+2 firms lose the third day, traditionally used as a buffer to handle mismatched trades and other problems arising between the investment manager and its broker.

This increased pressure will only heighten the motivation to further automate and standardize post-trade processes in Asia.

In fact, the InsightAsia study also found that 93 per cent of market participants in Asia still cited a need for increased automation in their post trade infrastructure, while 31 per cent desired more straight through processing to reduce manual processes and address disjointed systems and 21 per cent cited automation in fixed income as a priority.

93 per cent of firms in Asia cite a need for more automation, while 31 per cent are looking for ways to enable more straight through processing.

Hong Kong, Japan, Singapore, and Australia rate highly in terms of post-trade standardization and adoption of automation. This advantages them in handling T+2 settlement cycles at home and globally. At firms in Asia’s emerging markets less automated forms of communication, such as fax and email, often persist alongside more frequent manual touchpoints throughout the post-trade lifecycle, resulting in higher costs per trade, operational risk and greater exposure to trade failure and counterparty risk. Automation will ultimately bring these firms greater scalability, flexibility and efficiency to their middle and back offices. Standardized processes aligned with global best practice will also benefit them.

The US move to T+2 should be celebrated. It reaffirms that, globally, we are firmly on a path of shortening and harmonizing settlement cycles.

This serves to strengthen the global financial system as well as enable greater adoption of best practice and standards at financial firms. The winners are ultimately investors, globally and here in Asia.

This op-ed appeared originally in the Singapore Business Times under ‘Investors gain in US move to shorten settlement cycles’ in January 2018. It has been edited.