Regulators must scrap T+1 timezone tax

Settlement cycles for non-cleared margin rules must be extended


One of the more minor irritants of the UK referendum over whether to leave the European Union has been the resurgence in use of the term 'Far East' by members of both sides keen to burnish their globalist credentials. Where north Asia is far from would no doubt be a mystery to the 1.4 billion people who live there.

A pervading sense of mystery was also common to the dealers spoke to in Tokyo last week, as they struggled with the conundrum of how to meet the collateral posting requirements of the impending non-cleared margin rules. The European Union may have delayed implementation of its version, but this is a truce rather than a full-scale retreat.

Both US and European rules require collateral to be posted in the day after trading – T+1 – a rule that is no major issue when both counterparties are just a few streets apart in either London or New York. But Japan is 14 hours ahead of the US, meaning its T+1 ends before trading even starts in New York on the same day.

And it is not just Japan. Australia, Hong Kong and Singapore will also face the same problem, as will the emerging Asian economies of China, India and Indonesia when they loosen capital controls and start to trade more globally.

One potential solution is to pre-fund the collateral exchange, a technique that worked well when the Hong Kong Stock Connect opened to resolve the logjam caused by Hong Kong's T+2 cash equity settlement cycle, and the T+0 standard used on the mainland.

Global custodians have said they could provide a similar solution to resolve issues caused by the non-cleared margin rules, but these services won't be free. So not only does T+1 impose a 'timezone tax' on countries that aren't easily able to settle on a US or European trading cycle, it also erects barriers to trading the globe's two most liquid financial markets.

China's capital markets are so nascent that MSCI again this week declined to include A-shares in its emerging market index – with the main bone of contention being issues over investor access to capital. It should be unacceptable to global regulators that Asia-Pacific dealers will need the same pre-funding approach to trade Europe and US as they would to access an economy with capital controls.

Asia-Pacific dealers have already voted with their feet with regard to the US Dodd-Frank regulation and opted to trade with European counterparties instead. If T+1 is imposed on cross-border trades, this trend will accelerate and expand to include Europe's lenders.

Japan's dealers don't want to see a shift to Asian autarky, but the biggest losers in this scenario could well be Europe and the US. According to World Bank data, in 2014, China, Japan and India had the second, third and ninth largest economies in the world – the US and Europe ought to make it easier, not more difficult, to access their markets. T+1 should be consigned to the same wastepaper bin from which UK political commentators have recently rescued the phrase 'Far East'.

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