Gradually, then suddenly: The road to T+0

By Tony Lynch, CFO, FinClear

From Hemingway to tokenisation

Hemingway wrote:

“How did you go bankrupt?”

“Two ways. Gradually, then suddenly”

The same ways that settlement cycles moved from T+2 (trade plus two days) to the same day T+0 “cash upfront” model.

The starting gun was fired when US Securities and Exchange Commission (SEC) announced equity markets would transition to T+1 by May ‘24 (yes, just around the corner!).

SEC is shortening the settlement cycle to “better protect investors, reduce risk, and increase operational efficiency”.[1] T+1 lays the groundwork for a further move to T+0, likely well before 2030 and before the ASX CHESS replacement program is completed here in Australia.

The US commands a mighty 60.5% of global world equity markets[2] – where it goes, all other markets follow. Most major global markets will likely move to a similar timeline shortly.

Isn’t Australia a leader in this space?

Once upon a time, it was: in 2015, when the ASX announced plans to adopt distributed ledger technology (DLT) to replace its aging CHESS infrastructure, it and Australia were seen as innovative pioneers. Alas, it never came to be.

A 2023 report found: “In the early 2000s, Australia was at the forefront of global financial markets capabilities. The stock exchange adopted electronic trade execution, clearing and settlement ahead of many other global markets…However, Australia’s financial market infrastructure and related regulatory architecture has failed to keep pace with global changes.”[3]

As a result, Sydney fell from 7th on the Global Financial Centres Index to 13th, and Melbourne from 18th to 31st. The latest announcements from ASX indicate a full CHESS replacement is now unlikely before 2029.

This puts Australia behind the eight ball, lagging significantly behind other global exchanges by staying stuck in an outdated T+2 settlement environment.

There is a solution: Australia could leapfrog T+1, and instead move straight to T+0 as part of the CHESS Replacement project.

A move to T+0

This is where “gradually, then suddenly” comes in.

For a generation of stock market investors, T+0 is already here and a normal way of life. FinClear clients Stake, Superhero, Think Markets, and Grow Markets have been leading innovation and T+0 is their only method of settlement. Their customer base of younger investors would be surprised and inconvenienced by an “analogue” T+2 cycle.

So, the technology exists, and it is entirely possible to implement T+0 today on the retail investor side.

The process will be more gradual for traditional stockbrokers and their wholesale clients – and, more importantly, for ASX Clear to update CHESS. Gradual, but entirely possible. Technological advances mean same day payments are possible now – even on a cross-border basis. Yes, large financial institutions and global custodians will have to invest in new processes and systems, but they have anticipated this for years and knew the time would come.

The tech is here

FinClear has shown how change can be introduced. We support a wide range of clients and settlement methods – from traditional firms facilitating various methods (including direct debits and BPay), to FinTechs who operate “cash on platform” as their core model. We’ll continue to support all of these and facilitate any required regulatory changes, leveraging our experience as Australia’s largest wholesale servicer provider.

We already help clients with T+1 settlement for global equities. Using our existing “FinClear rails”, we facilitate cash payments directly from end-client bank accounts and provide real-time competitive FX conversion and payment to US service providers. We’ve transacted live trades, and funded US domiciled providers direct from end-client bank accounts in under 2 hours.

We’ll continue to grow this service via a new “FinClear Cash Hub”: clients will set up dedicated trading cash accounts for end clients on our platform and achieve a T+0 settlement operating model for domestic and international equities.

This will be an optional service for all FinClear clients and will lower their costs by reducing failed settlements and allowing them to access cheaper pricing via STP trading.

Tomorrow’s technology

Regardless of how the ASX proceeds, FinClear is committed to offering clients the option and efficiencies of T+0.

Our FCX platform facilitates atomic (instant) settlement for private markets. We’ll extend this capability to listed equity markets and other asset classes in coming years. Fund managers are already looking to list products on FCX to facilitate a secondary liquidity market that is more sophisticated and efficient than traditional time-consuming processes.

At FinClear, we agree with the SEC: Given the ever-increasing pace of advancements in technology, including distributed ledger technology, shortening the standard settlement cycle [to T+0] in the near future may be both desirable and feasible”.

There is only one possible end game for listed equity markets and that is T+0 settlement. It has significant advantages around customer experience and cost efficiency for brokers and other intermediaries. The rest of the world has already started to move there, and Australia will (eventually) have no option but to follow. At FinClear, we’ve already started and are committed to staying this course.

This article is general information and does not consider the circumstances of any investor or constitute advice. Material published in SIAA Newsroom is copyright and may not be reproduced without permission. Any requests for reproduction will be referred to the contributor for permission.