Global investment houses are bracing for more failed trades as a result of plans to halve the time it takes to settle US stock transactions to just one day.
About 60% of asset managers fear a higher rate of failures will be the result of regulations that will take effect in May that will speed up the time it takes to complete a US securities trade. That’s according to SIX Group’s Future of Finance report, which surveyed 343 C-seed executives at financial institutions around the world.
The looming change will put stocks on the largest stock market out of step with not only global peers, but also the world of foreign exchange, where trades typically take two days to complete. This threatens to create new risks for companies unprepared for the transition.
“The move will impact European market participants who trade in US securities, especially as the risks associated with moving to T+1 include penalties if the solution fails,” said Nicholas Phillips, market structure researcher at Bloomberg Intelligence. “If you’re selling shares in the UK at the same time as buying shares in the US, the different settlement cycles create funding and currency risk.”
Major financial institutions including banks, brokers and investment houses now have less than seven months to prepare for America’s shift to what is known as T+1, after it moved to T+2 back in 2017. It must be a headache especially for abroad. investors without a global staff presence, as time zone differences exacerbate the rush to execute trades on schedule.
“Asset managers are clearly concerned about the potential for errors in a more compressed time frame,” said Steve Carlin, vice president of aftermarket processing firm AutoRek. “The reality of a shorter settlement cycle for US stocks and bonds means a much faster turnaround for tasks like the reconciliation of trade details between different firms.”
More than half of European financial companies with fewer than 10,000 employees plan to either move people to North America or hire overnight staff, an earlier survey sponsored by the Depository Trust and Clearing Corporation revealed. Edinburgh-based Baillie Gifford is among those traders moving to New York, so they are better placed to execute transactions at the end of the US session.
SIX’s findings chime with a separate Bloomberg Intelligence survey of European buy-side traders, which found 59% did not favor a faster settlement cycle.
“Perhaps the most prominent discussion in financial regulation right now is about the implications of the shortening of the securities cycle to T+1 for US securities,” Jesús Benito, head of domestic custody and commercial deposit operations at SIX, said in the report. . “There will be different setup cycles between North America and Europe over the near to medium term, which may explain why many respondents anticipate greater operational complexity.”