By Vikas Srivastava, Chief Revenue Officer, Integral.
Significant enhancements to market structure always result in technological innovation to better enable market participants to handle any changes. With the introduction of T+1 for US securities less than one year away, there are multiple elements that need to be considered. For European and Asian based market participants, how FX trades are conducted to source the required currency to purchase securities is a key consideration. Firms will be up against it under T+1 to match their equity trades and execute the FX trade required to source dollars to settle the equity trades.
Take a UK fund manager buying 10,000 shares in Apple at $200 dollars per share. Buying these shares would cost a fund manager $2 million dollars. If the fund manager wants to buy the shares, they will need to deliver the full amount of money on T+1 – otherwise the trade will fail. Perhaps the fund manager finds themselves in a situation where, once they account for all the various commissions, the overall number is $2,010,000.56. Therefore, to get an accurate net price to the penny, the fund manager needs confirmation of the trade from the back-office as quickly as possible, and then carrying out the GBP/USD trade to make sure that the equity trade can settle in time.
This not atypical trading situation gets to the heart of the challenges firms face around T+1. Nothing changes in terms of how a trade settles, it is simply that firms have a much shorter amount of time to play with. It is no longer possible to wait an entire day to figure out what the final number is – everything needs to be completed a day earlier. Any UK fund manager will operate in pound sterling, not dollars. Therefore, they will need to carry out the trade by converting sterling into the precise amount of dollars that they need to deliver not just on Apple, but all their US cash equity trades. Essentially, this significantly compresses the timeframe in terms of how quickly a fund manager needs to get hold of dollars to complete what could be numerous US cash equities trades, all while ensuring the settlements have taken place within the day.
The only solution to this predicament is much tighter integration between the equity and FX trading systems. As soon as the back-office has confirmed the US cash equities trade, this information needs to flow seamlessly to the FX trading systems with no errors. There is simply not enough time for manual intervention in the world of T+1. For any firm looking to do this level of automation – they will need to lean on the agility and flexibility of cloud-based technology, as this is the only way they can get a faster time to market. Cloud technology can more easily automate equity and FX workflows to help meet T+1 requirements in a timely and efficient manner.
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