U.S. Securities Settlement Shift Stirs Global Market Turbulence

The upcoming switch to a shorter settlement cycle for U.S. securities, moving from two business days (T+2) to one (T+1), is set to introduce significant operational upheavals for international fund managers. This change, aimed at reducing risks associated with unsettled trades, especially after market volatility episodes like the 2021 GameStop incident, is scheduled for May 28, 2024. However, it diverges from the global norm of T+2, prompting a reevaluation of transaction processes and strategies among global market participants.

Preparing for the T+1 Transition

The transition to T+1 is expected to impact cash management and foreign exchange operations, with fund managers needing to maintain higher cash reserves and navigate increased foreign exchange risks. The adaptation involves not only logistical adjustments but also financial considerations, as the need for immediate settlement could lead to greater operational demands and potential liquidity challenges.

Global Markets Grapple with U.S. Move

The shift is causing concern among international traders and fund managers, who must now align their processes with the faster U.S. timeline. This adjustment is complicated by the fact that many international markets will continue operating on a T+2 cycle, leading to potential transaction delays and increased trading costs. The Depository Trust & Clearing Corporation (DTCC) and other industry bodies are working to prepare market participants for these changes, highlighting the need for accelerated adaptation efforts.

FX and Financing Implications

The shortened settlement period could lead to disruptions in foreign exchange transactions and the necessity for more agile funding mechanisms to cover the gap between selling international securities and buying U.S. assets. This situation may boost the demand for overnight repurchase agreements, transferring additional credit risk to banks involved in these transactions.

Potential Market Impact

The move to T+1 could have wider implications, affecting liquidity in equity markets and the functioning of global index funds, particularly exchange-traded funds (ETFs) with mixed asset settlement cycles. Market participants are considering various strategies to mitigate these challenges, including adjusting fund structures and extending credit facilities to manage the increased settlement pressures.

This shift in the U.S. securities settlement cycle represents a significant challenge for international funds, requiring a comprehensive reevaluation of trading, funding, and risk management strategies to adapt to the new operational landscape.