Gaining commercial advantage from T+1 efficiency

Published on 26 June 2024

The move to a T+1 settlement period in the US creates commercial opportunities for sell-side firms with the right level of operational efficiency.

To discuss how dealers can maximise the value of their investment in better systems through the first, middle and back office, Marc Natale of Murex spoke with Trader TV at the Fixed Income Leaders Summit in Boston, outlining which clients they can support, how investment in new tech is hitting the top line, and what the next steps are to deliver growth on the sell side.

Interview Transcript

Dan Barnes Welcome to Trader TV your insight into institutional trading, I’m Dan Barnes. The US market has moved to the T+1 settlement period, which doesn’t necessarily align with other markets. Joining me to discuss the implications of this for the sell side is Marc Natale, head of pre-sales and marketing at Murex welcome to the show.

Marc Natale Great to be here.

Dan Barnes First of all, can you tell me how is T+1 affecting the dealer’s top line?

Marc Natale First, let’s look at global firms operating across borders and across time zones. They’re well used to managing T+1 or different settlement cycles. T+2 in Europe and the UK T+1 in the States, T+0 in India, and so on. Dealers can win business if they’re able to operate on a T+1 basis by providing trading in and out of the US for investors that are either solely US-based or overseas-based.

Having said that, managing the imbalance in terms of settlement times is not everything. You know, it’s super important to manage and optimize liquidity and inventory management. And the rationale for that is that liquidity has been a problem for a long time, and it remains a challenge. Many banks, in order to avoid settlement failures, have actually increased their lending buffers and intra-lend liquidity. In the next few months, we could expect actually a few more lenders to stop trading and disappear from the marketplace, and that should drive the pricing ultimately for the end users.

Dan Barnes How else can that technology be used in terms of creating efficiencies within the sell side?

Marc Natale The benefits, I think, are multiple. The first one, I would say, is that the systems in use, in order to make it more efficient to settle transactions on a faster basis are actually used to support traders and sales alike when it comes to providing them with greater transparency or improving the efficiency when it comes to transferring the inventory, when it comes to client support. So that’s one. Number two is technology has helped and will help providing greater straight-through processing rates. So that implies greater hit rates for market makers but implies a reduction of settlement favors in practice and overall a greater execution experience for the end users. The third aspect is related to capital requirements that are going to be improved because of a better inventory turnover, and finally will be access to short-term liquidity markets.

Thinking mostly about the repo market in practice, that has become extremely standardized in the US and elsewhere, and technology helps address this market. Transparency is key. So many firms can’t really grasp holistically all the assets made available within the firm coming from the cash desk, the securities lending desk, the repo desk, the collateral desk. And so about 15% of our client base today, for instance, have organized themselves, thanks to recent technology, to have a centralized hub that give them a control tower of all the financial universe they are in charge of. And that leads to better decision-making for trading, for collateral allocation, collateral optimization, and so on. And so we aspire to have more of these firms that will leverage technology and organize themselves accordingly.

Dan Barnes How do you see this potentially moving forward beyond T+1 for the sell side?

Marc Natale Well, I don’t think we can say T+1 is fully over. In fairness, we would really like to see these adopted in many other markets, the UK and EU for instance. And I think technology like ours at Murex and many others can really help market participants make that switch, maybe in a faster way than what we experienced over the past few months. So that’s one aspect.

Back to the initial question. I would say it’s about trust. Once you’ve established robust systems that provide the transparency, it’s much easier for the trading desk, the sales desk, to focus on the client relationship, spend the necessary time to work on your orders, or to research what best investment you should look into, which is much easier when everything is standardized but committed with a low operational risk. That’s what we can look forward to.

Dan Barnes That’s fantastic. Marc, thank you so much.

Marc Natale Thank you.

Dan Barnes I’d like to thank Marc for his insights today, and of course, to you for watching. To catch up on our other shows, including Trader TV This Week at 6:45 a.m. UK time every Monday morning go to Tradertv.net.

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(t+1, settlement, US T+1, sell side)