Transcript
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Speaker: Welcome to the Emerging Markets Spotlight, a podcast series from HSBC.
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Speaker: Hello, thanks for joining us today.
Speaker: I'm Neil Atkinsonant and I'm responsible for our bank and broker-dealer client relationships for security services here at HSBC based in London.
Speaker: I've just come back from a global transaction banking conference, Cybos in Toronto, where T plus one or reduced settlement cycles were very topical.
Speaker: Today, we aim to provide some insight into what it's all about
Speaker: why it's happening, what the impact might be, and what we all need to do to prepare.
Speaker: With May 2024 now only eight months away, we'll be looking at what the impacts are expected to be, what clients should be focusing on, and how HSBC is enhancing its offerings to support clients in this transition.
Speaker: So why are these settlement cycles being reduced?
Speaker: The main driver for the change is to reduce the pre-settlement risk of counterparties not delivering on settlement date, where that risk has been margined,
Speaker: As with transactions cleared at central counterparties, CCPs, decreasing the risk in turn decreases the margins and associated capital required.
Speaker: Capital efficiency and liquidity improves and costs are reduced.
Speaker: The DTCC estimates that removing one day's exposure to that risk could translate into a 41% reduction in the volatility component of CCP margin requirements.
Speaker: So clearly there are some benefits.
Speaker: I'm delighted to be joined today by four colleagues and HSBC experts from markets and security services who each come at this from a different angle, but critically with equally important viewpoints.
Speaker: So I'd like to introduce you to Sophie Mullanders, Custody Product for Europe and the Americas, Adnan Hussain, Head of Agency Lending and Liquidity Services, and Eric Chang, Head of FX Solutions APEC.
Speaker: And also, last but not least, Ashwini Kanadi, Senior Vice President of Product Security Services, Southeast Asia.
Speaker: So without further ado, let's start with you, Ashwini.
Speaker: India went live with T plus one reduced settlement cycle relatively recently.
Speaker: I wonder if you can take us through how this change was implemented and what your India experience was.
Speaker: Thanks.
Speaker: Thank you, Neil.
Speaker: So quite rightly, the Indian securities market regulator
Speaker: ushered transformative reform with the introduction of T plus one settlement cycle.
Speaker: Just to put this in context, the Indian equities market had already operated on a T plus two settlement cycle since 2003, which is nearly 20 years ago.
Speaker: What do we mean by market friendly staggered manner?
Speaker: To give the market sufficient time to get used to a concept of accelerated settlements, the stocks were introduced to the T plus one cycle
Speaker: based on the ranking of their market capitalization.
Speaker: So what the exchanges would do is they would announce a list of securities that would move to this cycle before the scheduled date of movement.
Speaker: Now, the very important place that the regulator had emphasized on was data-driven analysis to arrive at the confirmation as well as the settlement timelines
Speaker: in a manner in which there is a fine balance maintained between the requisitions of each of the multiple stakeholders in the Indian market.
Speaker: HSBC played an important role in ensuring continuous engagement with the securities market regulator and with the central bank,
Speaker: As you would realize in an accelerated settlement cycle, the challenges posed by FX and liquidity take center stage.
Speaker: As the data-driven analysis showed, we could assist our global clients with their FX and their settlements-related processes based on their geographic locations owing to the fact that we looked at
Speaker: the entire settlements process in further detail.
Speaker: Over to you, Mim.
Speaker: Thanks very much, Shesh.
Speaker: You mentioned FX and liquidity, so great that we have some experts with us today to talk about that in a bit.
Speaker: But first of all, we turn to Sophie.
Speaker: Sophie, we've been here before in the US in 2017.
Speaker: The US moved from a T plus three to T plus two cycle.
Speaker: What's different this time, do you think?
Speaker: And why is it creating so much anxiety?
Speaker: I know we hear from clients almost on a daily basis, particularly in Asia at the moment.
Speaker: Yes, we do, Neil.
Speaker: The point is that a lot of HSBC clients are European and Asian-based clients.
Speaker: So that means that this change is going to be a very big impact to these clients.
Speaker: Pretty much all clients, all investors are exposed one way or another to the U.S. as the largest capital market.
Speaker: And this change will impact most players, whether they are local or international brokers or investment managers.
Speaker: The first rule will require the broker dealers and investment managers to complete trade allocations, confirmations, and affirmations.
Speaker: Now, concerning the US, that move to T plus one implies a fundamental change in the trade affirmation process.
Speaker: So there's a change in the SEC rules, which will affect the clients.
Speaker: So this is the reason why people talk a lot about it.
Speaker: as soon as technically possible but in any case by no later than 9 pm on trade date eastern time so that is 2 a.m in the morning uk time or this is 9 a.m the next day in hong kong or singapore so it gives you an idea of the time challenge we are facing
Speaker: The second SEC rule is that the registered investment advisors need to also make and keep the records, including the date and the timestamp of all these trade confirmations, allocations and affirmations sent.
Speaker: So again, this is a big change in the process.
Speaker: Thank you, Sophie.
Speaker: So maybe turning to Adnan, Adnan, you're responsible for both Treasury and securities lending here for
Speaker: HSBC's security services business.
Speaker: A primary role for securities lending is to provide liquidity.
Speaker: So T plus one clearly going to have a knock on effect on stock lending and borrowing, like Sophie alluded to, with less time to identify and recall the loans, settlement fails, and resulting penalties could rise, of course.
Speaker: What opportunities and challenges do you see, Adnan?
Speaker: I think it's a good question.
Speaker: From a securities lending perspective, perhaps to be contrarian, to start off on the opportunities front, ultimately, we have seen settlement cycle decrease over the years in several different markets.
Speaker: Each time that did take place, the role of securities lending essentially as a liquidity provider did allow us to effectively enable the market
Speaker: They supply the sufficient assets in order to meet the appropriate settlement.
Speaker: So, you know, certainly there is an opportunity associated purely from a lending perspective on a performance basis.
Speaker: Efficiencies from an operational perspective, as well as just operational risk and cash and liquidity risk are really at the forefront to try to be able to manage within this type of a transition.
Speaker: So from an operational perspective,
Speaker: a lot of the framework around streamlining of recalls as well as the settlement process in general associated to both the collateral and loan side are effectively at the forefront in this type of a transition.
Speaker: And in order to really address those from an asset manager's perspective,
Speaker: The way that you're communicating the technology that you would be using with your custodian as well as your brokers are huge enablers to be able to ensure a smooth transition effectively into this T plus one advantage.
Speaker: I think that operational capacity and the way that we would process recalls, accelerate the timings to receive cash notifications from our underlying clients, and so sales notifications from our underlying clients, as well as perhaps from a treasury perspective, consider the advent of the likes of free funding to help mitigate some of the challenges that are then drawn out of time zone challenges that you've heard of from Sophie as well.
Speaker: Addressing some of those challenges through the likes of free funding
Speaker: our options to be able to really get ahead of it and mitigate any negative impacts associated with the transition.
Speaker: I think one last point I did want to really raise was the U.S. certainly would be the largest by way of capital markets, but in a securities lending construct that accounts for nearly 60% of the market today, U.S. treasuries and certainly the government bonds in general would be one of the largest asset classes traded and have done so on a same-day basis for an extended period of time.
Speaker: Having seen the smooth fashion in which those have traded, it does lend a lot of confidence into the transition on T plus one for the equity businesses.
Speaker: Yeah, thanks, Adnan.
Speaker: Really good point on T-bills, actually.
Speaker: Eric, Adnan mentioned pre-funding.
Speaker: If we look at the FX component, something that's obviously critical to successful settlements, I know that you're speaking to clients on a daily basis now who've got some concerns about when the transition's occurring and the time left to prepare for that.
Speaker: But what's your view, please, Eric?
Speaker: So really, we're seeing two sets of clients, right?
Speaker: There's a group of clients generally based in restricted currencies that do
Speaker: currently prefer to pre-fund trades, right?
Speaker: So I think the T plus one transition is going to be a less of a concern for them.
Speaker: Generally, when they receive their base currency and they immediately start hedging into USD, that USD is going to be ready for security settlement from day one.
Speaker: So they're a little bit less concerned.
Speaker: Maybe instead of T plus two starting, they may try to revert back to T plus one and just try to maintain some cash balances available.
Speaker: I think in the past when
Speaker: US rates were definitively lower than a lot of the yen carry currencies.
Speaker: There are some cost concerns around that, but obviously with the great environment where it's at, the concern is a little bit less for them for early pre-funding.
Speaker: I think the real impact for Asian and immediate clients are those that do prefer to deal FX,
Speaker: on a post-securities execution basis.
Speaker: And that leads to a lot of knock-on effects, right?
Speaker: Now with US point of T plus one, for an Asian or media investor that's waiting for the securities amount to match a firm and then generate the X orders for that execution, they're looking at T plus zero execution window.
Speaker: Right.
Speaker: There's there's a lot of concerns around this.
Speaker: Essentially, if you get your FX incorrect, it's just leading to an immediate settlement failure, right, which is what everybody wants to kind of avoid.
Speaker: So I think really improving and streamlining the post trade cycle to ensure that they're getting those FX orders affirmed and then subsequently sent on for execution will be critical.
Speaker: The big concern that I think two or three markets really have in JPY, Aussie, and Kiwi is the early cutoff of those markets, right?
Speaker: I think when you're talking about the yen market, the cutoff for that is substantially earlier.
Speaker: I think the affirmation cutoff is 9 p.m.
Speaker: Eastern, which is 9 a.m.
Speaker: Hong Kong.
Speaker: That's like 30 minutes left for execution.
Speaker: And it's going to be similar to AUD as well.
Speaker: So those are some of the main concerns that we have been seeing arising out of the region.
Speaker: Yeah, you're right.
Speaker: The market here in Europe has just gone through the whole CSDR and settlement discipline regime and now embracing this new challenge.
Speaker: What are the options available to HSBC's FX clients then?
Speaker: What can they do, do you think?
Speaker: Yeah, so I mean, there's the...
Speaker: There's three readily options that we're looking at.
Speaker: Previously mentioned was pre-funding.
Speaker: I think if you're pre-funding your FX, it's a little bit easier.
Speaker: You have less to worry about.
Speaker: But realistically, it's about outsourcing FX to a third party.
Speaker: So, I mean, generally speaking, when people buy into U.S. securities like Sophie had alluded to,
Speaker: they don't generally prefer to pre-fund or do FX standing instructions, but that's going to have to be considered as an option.
Speaker: If you leave the FX to be outsourced to a custodian bank, you have less concerns about the funding issue.
Speaker: And lastly, it's about maintaining U.S. presence for either execution or middle office or back office, right?
Speaker: So a lot of discussion
Speaker: that we had, you know, half in jest, half out of concern is, do we need to set up a US desk?
Speaker: Do I need to have a desk in the West Coast after US equity closing?
Speaker: And these are some legitimate concerns that a lot of asset managers are kind of grappling with and the potential cost increase behind expanding their presence, expanding desks that they have and how they're really going to staff that going forward.
Speaker: Yeah, OK, that's a good point around US presence.
Speaker: And what about CLS?
Speaker: Any impact there for asset owners?
Speaker: Yeah, so the CLS cutoff, so CLS isn't available for T plus zero settlement, right?
Speaker: So you have to be in a T plus one settlement.
Speaker: So the cutoff for that is, I believe, 6 p.m.
Speaker: Eastern, depending on the time zone and whether it's summertime or...
Speaker: or non-summertime, but that's for CLS itself.
Speaker: A lot of custodian banks have a 4 to 5 p.m.
Speaker: settlement cutoff.
Speaker: But yeah, I mean, so the CLS cutoff for custodians, they need to receive it an hour to two hours prior to that before they can even allow for that CLS settlement.
Speaker: So CLS is potentially out the window now.
Speaker: So there's a lot of bilateral risk flying around in FX for the entire U.S. securities market.
Speaker: And that is going to be a concern.
Speaker: And it's going to increase potential settlement risk.
Speaker: And a lot of houses are going to have to relook at bilateral kind of
Speaker: settlement limits going forward.
Speaker: Thanks, Eric.
Speaker: Sophie, turning back to you now, you know, if we look at the various stages in the settlement process, and I think impact on affirmation, we already touched upon them for clients in the non US time zone.
Speaker: What does it mean for them?
Speaker: Yes, as we've said, so this affirmation process is going to take place by trade date 9, 9 p.m.
Speaker: Eastern time.
Speaker: So what does that mean?
Speaker: It means basically for Asian and European-based clients, an extended working day.
Speaker: if they choose to do so.
Speaker: So that means also that the client's brokers may actually execute and affirm the transactions for the European and Asian clients when the clients are no longer available.
Speaker: There's nobody left at the office unless the client decides to, yes, set up a U.S. desk or decide to start working U.S. hours.
Speaker: That also means that the client oversight may no longer happen on the trade date.
Speaker: So that's an important point as well.
Speaker: On our side, we want to help our clients.
Speaker: So that is an important point.
Speaker: We want, there is an opportunity for everyone along the trade lifecycle to automate, including custodians.
Speaker: And if some clients have the ability to do so, we will be ready to offer to them the model whereby all what they need to do is to actually place an order to their broker,
Speaker: get a trade suite identifier, their own identifier, that can be used in order to affirm the transactions.
Speaker: If they do that, when they place the order with their broker, at the end of the day, that will create a much smoother model for the clients because we will be able to generate the settlement instruction on the back of the trade affirmation on behalf of the client.
Speaker: So essentially speaking, if the client wants to use that methodology, we do not need to receive a settlement instruction from the client.
Speaker: So actually we can create a much more streamlined process for the clients if they have the ability to support that model.
Speaker: If they don't, still, by using their own trade suite identifier, clients will have the opportunity to send us the settlement instruction by T plus one, no problem at all, because the affirmation will have taken place the day before on time.
Speaker: Now, if the clients say to us, we do not want to go that direction and we would like the custodian to self-affirm for us, this is really where the client needs to be very mindful about the timing of that option.
Speaker: As said, because the affirmation needs to take place by the end of the day Eastern time, 9 p.m., that means that we will need to receive the settlement instruction in that case from the client on the trade date.
Speaker: So that is going to be a big change for the client.
Speaker: Thanks, Sophie.
Speaker: Yeah, okay.
Speaker: Sophie, you touched a bit on kind of innovation.
Speaker: Adam, maybe turning over to you, you know, there's maybe some short-term opportunities and challenges to overcome, but how do you think we, the banks and clients, can utilize technology to improve innovation?
Speaker: process.
Speaker: There's still quite a lot of manual process involved in much of what we do in this world.
Speaker: And I think what we have seen is that technology has made one of the biggest differences from a lending perspective over the last few years.
Speaker: A lot of that has come down to the way that we receive instructions, the way that we're processing requests for collateral, the way that counterparties and agents, for example, will communicate with each other as well.
Speaker: So just anecdotally, a lot of
Speaker: So our business today is approximately 98% SDP.
Speaker: From the inception of the instruction coming through, from the sale instruction coming to us from our client, to requesting that recall from the counterparty, replacing the collateral back, all of that process, really focusing on an improved technology infrastructure to be able to then deliver that in an automated fashion.
Speaker: is essential to be able to meet the T plus one, certainly, but other kind of market regulatory requirements as well.
Speaker: I think this transition to T plus one also will hopefully enable us to kind of just move towards a bit more of a standardized approach.
Speaker: Having a consistent and standardized method by which data is certainly being both utilized as well as transmitted,
Speaker: does offer more opportunities for that automation to really have a positive impact.
Speaker: And I think equally where you consider the cash market, the idea from a treasury perspective is a very big focus for the regulators to actually encourage the short and set in the second and the first place, because the ability to be able to better manage the internal cash balances, the balance sheet effectively, and the costs associated to that staggered cash
Speaker: And the capital and the margin relief that that brings, the shortened settlement cycle, I think has a lot of attractiveness across the entire value chain.
Speaker: Yeah, thanks, Ednan.
Speaker: Eric, I suppose, a question coming in regarding FX and liquidity.
Speaker: So the question is that the Indian market was much smaller in terms of
Speaker: FX, what is being proposed now in the US is much bigger.
Speaker: What do you think the liquidity impact will be?
Speaker: It's a good question.
Speaker: The reality is a lot of people do tend to do execution around equity market closing, and that's generally 4 p.m.
Speaker: Eastern time.
Speaker: Where FX liquidity has a tendency to drop off, obviously London is closed at that point, and we're slowly moving into what they like to call the witching hours, which is
Speaker: if the reality is in between new york and until kind of asia steps in in full with with japan hong kong and singapore liquidity drops off substantially so i think the question a lot of us do have is is that liquidity not going to shift to beyond 4 p.m maybe until 4 p.m 5 p.m will the west coast slowly kind of pick up some of that liquidity and provide some liquidity until until asia steps into the gap and again i'm
Speaker: on friday where where liquidity is historically a little bit lower post post equity closing until it just steps in who is really going to fill in those gaps the reality is the more that fx starts to kind of become executed in those hours that liquidity profile will will likely shift so i think we will see a shifting of that liquidity to an extent
Speaker: as people do start to consider working later out of London.
Speaker: Sorry for you guys in London, but you guys would have to consider staying behind to make sure your FX is executed on a T plus one basis as opposed to a T plus zero basis the following day right before the US market is opening.
Speaker: So I think those are real concerns.
Speaker: We are just kind of really guessing as to what that potential impact would be.
Speaker: But speaking to a lot of investors, it is kind of the focus is about either waiting until Asia is on full flight and moving to a T plus zero settlement model or alternatively try to execute around the U.S. equity close and hoping that liquidity profile will shift, at least for the G7, the G10 currencies.
Speaker: There's going to be a little bit of an increase in liquidity around that time zone.
Speaker: Thanks, sir.
Speaker: But I suppose Ashwini, thinking about India, we know that there are proposals to go even further beyond T plus one.
Speaker: So what's happening next for you?
Speaker: Can you talk to us about that?
Speaker: Thanks.
Speaker: So after the success of T plus one, our security markets regulator, SEVI, is now planning to roll out T plus one settlement process in India.
Speaker: This is specifically for retail investors by March 2024.
Speaker: And after the success of that, hopefully then they want to, and they've announced this, move on to instantaneous settlement by the end of 2024 for this retail segment.
Speaker: The exchanges and the clearing houses in India have been tasked to work on the model, applying what we currently do in the primary markets for initial public offering.
Speaker: There is a specific process that's followed in India.
Speaker: They will try and apply this to the secondary market trades for retail investors.
Speaker: Our regulator is cognizant of the fact that you cannot directly jump from T plus one into instantaneous settlement.
Speaker: Therefore, it is their belief that you can move to a T plus one hour settlement with existing technology.
Speaker: And then within one year of following the technology changes by the clearing corporations, you could move to an instantaneous settlement for retail.
Speaker: So that's what is next in India.
Speaker: Thanks Ashwini.
Speaker: And instantaneous settlement also sometimes referred to as atomic settlement as well, of course.
Speaker: Turning to Adnan and Eric, do we think that T plus zero is going to become standard across other markets?
Speaker: Maybe Adnan, first of all, what do you think?
Speaker: Certainly, you know, I think we have seen the proliferation of DLT really coming into the marketplace now.
Speaker: So there potentially would be considerations around T plus zero for securities.
Speaker: I mean,
Speaker: I'm not sure that zero actually does apply from a funding perspective to the same likelihood as security.
Speaker: So it will certainly be challenged to transition to a T plus zero environment in the way that funding currently is organized.
Speaker: I think probably an eventual move to T plus zero cannot be discounted, but the reality of certainly time zone difference does make it a little hard to envision to happen today.
Speaker: Yeah.
Speaker: Okay.
Speaker: Thanks, Adan.
Speaker: Eric, your view?
Speaker: I mean, just absolutely just kind of echoing what Adan says, right?
Speaker: The reality is we do work in different time zones and, you know, going to T plus zero is going to be challenged.
Speaker: I think for other markets, moving to T plus one, potentially down the line, the reality FX is still on T plus two.
Speaker: And there's a lot of discussion about will FX eventually kind of track the move toward T plus one?
Speaker: Obviously the loony dollar candle is already, already there at T plus one per spot.
Speaker: But will we see kind of accelerate settlement for some of the other currencies track this as well?
Speaker: I think another point that people don't really think about is when you move from a spot to value today, value FX settlement, there's additional swap risk added to that.
Speaker: And when you start moving around kind of maybe holidays or
Speaker: or quarter end or kind of these stress market points the spot rate that you're executing at is not necessarily the fx rate that you're going to be settling at especially around quarter end year end any kind of these stress market points on the swap points can get exaggerated it is it is a funding cost there so
Speaker: Maybe possibly some of the FX spot could be compressed a little bit to reduce some of that.
Speaker: But I think it's really, it's going to be about, is the technology there to support us?
Speaker: Are we going to increase the settlement or are we going to be using DLT?
Speaker: And will that backend support and will, of course, the central bank supports for a lot of these currencies, really help to track that and push that forward?
Speaker: Thanks, Eric.
Speaker: Thank you.
Speaker: I suppose coming towards the end of our session here, is the market ready?
Speaker: We titled this session here today, Are You Prepared?
Speaker: Do you think people are prepared?
Speaker: Look, we discuss with clients on a daily basis.
Speaker: And I'm not going to lie to you, we sense the nervousness of our clients around this, also of the market players.
Speaker: We will be ready as custodians, so we will have the toolkit in order to support our clients.
Speaker: But as I said before, we need to ensure that the process works along the entire chain.
Speaker: And so that means that we need the brokers to be on board.
Speaker: We need the investment managers to be on board.
Speaker: There is a lot of changes that need to take place and automation, and there is very little time left.
Speaker: And so that's why for us, it's so important to have this constant dialogue with clients.
Speaker: We have people here in London, in Asia, in Germany, talking to clients on a daily basis about this C plus one model.
Speaker: And I think Eric, similarly for you.
Speaker: I mean, honestly, we're in the process of getting ready.
Speaker: It's funny, I think since February, when it was announced, we've had so many internal
Speaker: meetings and calls and we've started the market outreach fairly early in the process just just speaking to clients try to figure out what their thought process is around that and just understanding how they're doing their u.s equity related transactions are they pre-funding are they doing it on a post-execution basis
Speaker: And just kind of wrapping our heads around that.
Speaker: I think the reality for the F market is there's not much we can do until the security side of this formula is really kind of ironed out.
Speaker: And that timeline is really set for us to understand what we could do around the FX, but definitely around a lot of key topics.
Speaker: So we're getting there.
Speaker: We still have some time left.
Speaker: So I wouldn't be too,
Speaker: too nervous, but it is coming.
Speaker: And of course, we are having daily conversations.
Speaker: I have quite a number of calls.
Speaker: So if you guys do have further questions or if you guys do have some points that even we haven't thought of, right, I think we're all learning together and it's about trying to figure out exactly what our needs are, what your needs are, and what HSDC can do the best
Speaker: help you prepare.
Speaker: And if there's something that we're missing, we absolutely want to hear that feedback.
Speaker: So we can take that under consideration and build out the best possible product for our clients, you guys, to really be able to consume and embark on this as pain-free as possible.
Speaker: Thanks, Eric.
Speaker: Yeah, excellent.
Speaker: Thank you, Ashwini.
Speaker: Look, Ashwini, Eric, Sophie, Adnan, thank you so much for joining today.
Speaker: From all of us here at HSBC's Markets and Security Services, we wish you all the best of luck.
Speaker: As Eric said, we're here for you.
Speaker: Please get in touch with any questions that you might have.
Speaker: Thanks.
Speaker: Thank you.
Speaker: Thank you for joining us for this episode of Emerging Market Spotlight.
Speaker: We hope you enjoy the discussions.
Speaker: HSBC is uniquely positioned to connect investors and corporates internationally.
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