The upcoming shift to a shorter settlement period for U.S. securities transactions presents challenges for global fund managers. This change, which moves the settlement from two business days after a trade (T+2) to just one (T+1), aims to reduce the risk of unsettled trades during volatile periods.
Upcoming US Stock Settlement Changes To Affect International Funds
This adjustment, set to take effect on May 28, contrasts with the T+2 cycle common in most other parts of the world. It will prompt industry participants to revisit their operational strategies to mitigate transaction failures and elevated trading costs.
Ben Springett from Jefferies highlighted that adapting to this new cycle could necessitate higher cash reserves in funds to manage potential discrepancies, which could negatively impact fund performance.
The Depository Trust & Clearing Corporation (DTCC), alongside industry groups like the Investment Company Institute (ICI), has been guiding the sector through this transition, emphasising risk reduction and operational advantages despite the complexity of the shift.
The transition to a T+1 cycle is expected to intensify liquidity management demands, particularly for foreign investors needing to secure dollars for U.S. trades. This could potentially complicate foreign exchange (FX) transactions. Nathan Vurgest of Record Financial Group noted potential increases in FX costs if trading volumes shift to later in the U.S. trading day, away from the more liquid London morning hours.
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The European Funds and Asset Management Association (EFAMA) flagged concerns about systemic risks to Europe from the accelerated U.S. settlement timeline. This change limits the timeframe for confirming trades and submitting them to CLS, the principal global multi-currency settlement system, potentially pushing a significant volume of daily FX trades outside the secure confines of CLS.
Some market participants are considering operational shifts, like establishing bases in the U.S. or aligning their work hours with U.S. markets, to manage these challenges. The shorter settlement cycle may also spark a greater need for short-term financing solutions, such as overnight repurchase agreements, thus transferring more credit risk to banks.
Custodian banks, which safeguard client assets, may face increased demand for short-term credit and overnight funding to accommodate settlements across various systems and time zones. However, such lending is typically not committed, highlighting the non-guaranteed nature of this support.
Furthermore, global index funds, including exchange-traded funds with diverse asset mixes, could experience disruptions due to settlement mismatches. Managers might need to segregate settlement cycles based on the proportion of U.S. assets within funds to manage this disparity.
