T+1 Could See Swiss Private Bankers Doing Night Shifts Soon
Banks and asset managers must comply with a shortened settlement cycle for US securities. Research shows over half of domestic players haven't even started to prepare. The implications for Swiss finance are profound.
By The Good Guys Company, with Andrea Sturm (J.P. Morgan) and Christian Cebreros (TGGC)
The Swiss financial hub won't be able to avoid the prevailing trend worldwide towards ever-higher transaction speeds and frequencies for much longer. In August, for example, the Swiss National Bank (SNB) will force banks to complete payment and settlement between two parties in ten seconds, instead of overnight or within two working days.
Shortened Settlement
The SNB's so-called Instant Payments standard is very relevant for the public at large and retail banks. But beyond that, domestic private banks, and wealth and asset managers have another key milestone looming on the horizon. From 28 May onwards, Swiss financial institutions will have to keep to T+1, a shortened settlement cycle, when trading US, Canadian and Mexican equities.
The term is short for trading date plus one working date and it is a US-driven impetus to shrink the current T+2 settlement requirements currently in force in most markets in the world by half.
Why the SEC Pushed for T+1
The US Securities and Exchange Commission (SEC) drove the initiative in response to the turmoil during the meme-stock episode of 2021, when significant trading restrictions and liquidity shortfalls exposed weaknesses in a T+2 world. A shorter cycle reduces the window for counterparty default, credit risk, and speculative attacks — ultimately making markets more stable and efficient. Faster cash recycling also strengthens overall market liquidity, allowing participants to deploy capital more productively.
No Avoiding It
The shift is an eminently important one for Swiss finance given that it traditionally has had large numbers of international clients in its wealth management businesses. Beyond that, the proportion of US shares in the MSCI World is currently at 70 percent, with 40 percent of securities worldwide listed on the index. That means that Switzerland, as a key offshore hub, won't be able to avoid complying with it.
Significant Change
Observers are becoming alarmed. It is only dawning on most in the financial sector that a very significant change looms ahead. As Andrea Sturm, head of J.P. Morgan's securities services business for Switzerland and neighbouring German-speaking countries, put it: "Many Swiss players haven't yet noticed that T+1 is going to be an issue for them." She and her team have been helping local banks and intermediaries get up to speed before the deadline.
The Challenge for Counterparties
The sale of a security is not a simple transaction between buyer and seller. A trade involves several parties including intermediaries. Over two days before the trade is completed, everyone makes sure that everyone meets their obligations. The central counterparty is key to clearing any transaction. It acts as an intermediary and guarantees the smooth processing of the trade to both the buyer and the seller. That means it also assumes the counterparty risk. If one of the two parties can't meet their obligations within the specified two days, it acts as an insurance policy.
Higher Error Quotas
That is significant given that things can go wrong. The parties are often located in different time zones. There can be communications and liquidity issues. Currently, the error quota related to T+2 trades is about 5 percent and that is something the intermediaries can stomach. Players who are not prepared for T+1 could see that quota rise to as much as 20 percent.
Competitiveness at Risk
The domestic financial hub could see an erosion of its competitiveness. Intermediaries, custody banks, and US regulators wouldn't take substantial increases in error quotas for very long. Misstrades have to remain an absolute rarity as prevailing regulation wasn't written with the intention to make custodians and counterparties use their balance sheets as an intermediate financial backstop.
Being Locked Out
Intermediaries will start to charge higher interest rates on constrained capital as a first step. If Swiss players are chronically late with fulfilling their obligations, they run the danger of not getting the service required, or getting it for a significantly higher interest rate. At the end of the day, that means that they could end up being locked out of the largest securities market in the world.
According to an official survey, most are very behind with making arrangements. Half of them have said they haven't started preparing for T+1.
The European Dimension
The impact extends well beyond Switzerland. Pension funds, banks, and asset managers across Europe are particularly affected. The shorter settlement cycle puts immense pressure on processes and systems that were designed for T+2. European wealth managers and institutional investors must accept that the time available for problem-solving and error correction is being drastically reduced. The pressure to provide liquidity and securities on time rises significantly.
No Easy Solution
There is a great deal of work ahead. Private banks and smaller asset managers don't have night desks for trading and settlement. Given the time zone difference with the US, they would lose precious hours in a T+1 world. Besides that, most still have manual processes, which take up time.
There is no easy solution to the current conundrum. Every institution has to be looked at individually. It seems unavoidable that the sector will invest a significant amount of money to make the change. Outsourcing the process to specialists and mobilizing a night service will both prove expensive.
Canceled Vacations
But that is still likely to be much cheaper than paying late dues and interest en masse while irritating clients. J.P. Morgan, which also serves as a settlement intermediary, is hoping that banks will start to react more quickly as the deadline approaches. "We don't want to have our Swiss clients left behind," Sturm says. But she is also preparing for the eventuality that many domestic players won't be ready in time. "I have provisionally asked my team to cancel any vacations in June," the well-versed banker indicates.