with Laetitia Visconti, director for market structure & execution services, Barclays; Evan Canwell, equity trader and market structure analyst, T Rowe Price; and James Baugh, head of European market structure, TD Cowen.
(This article first appeared in Best Execution, a Markets Media Group publication.)
Best Execution asked Laetitia Visconti, director for market structure & execution services at Barclays Investment Bank and Evan Canwell, equity trader and market structure analyst at T Rowe Price and James Baugh, head of European market structure, TD Cowen, which market structural changes could have the biggest impact in 2024.
“In 2024 we will see major changes in equities markets, with T+1 going live in Americas and discussions likely to progress in EMEA,” says Visconti. “The US move to T+1 is going to have a big impact on our region because of the change to funding,” says Canwell. “A manager like T Rowe might buy a US security with the cash required on T+1, and then sell in Europe or Asia T+2 so there’s a one-day funding mismatch, which will have to be managed.”
The move to T+1 is going live on 28th May 2024 in the US and, with increasing awareness that the SEC is not backing down, capital markets firms are taking the change seriously as it will create a funding mismatch between trades conducted within and outside of, the US market.
“UK regulators are looking at T+1, but their first effort at a report was due for December 2023, and is now due for January 2024,” he says. “The plan is to then publish their findings in December 2024. That would be the absolute earliest that the UK could move on it, which feels unlikely.”
Dates in Europe would be further out and there are concerns about further regulatory fragmentation.
“In Europe, they’re looking realistically at 2026 or 2027 when they can move to T+1 because of the complexity that comes with the fragmented nature of settlement and clearing across the continent,” Canwell notes. “With that length of delay, some people are asking why, if it’s going to take that long to move to T+1, why not move to T+0 straight away? While the UK can technically do what it wants post-Brexit, we are still seen as one trading region so it would be even more frustrating for the UK to move to T+1 while Europe stays on T+2. It would be better for the UK and Europe to move together.”
The dynamic between European and US markets is affecting other parts of market structure says Visconti.
“From a trading perspective, the focus has been shifting back market structure fundamentals with geographical Europe trying to counter ever decreasing trading volumes and flight of listings to the US,” she explains. “I would expect discussions to progress on key enablers to return to growth such as research, listing, retail trading and overall promotion of European Equities. Outside of geographical Europe, I would watch out for the Middle East markets, where there is a renewed focus on capital markets development, with measures to attract more listings and foreign investments, not forgetting a trend for local investors to diversify, including by trading outside of their regions.”
There are also crucial developments between the UK and the EU, says Baugh, which could support greater transparency and liquidity.
“Impending changes to UK trade reporting requirements are set to offer a first step towards a clearer understanding of business conducted away from public markets, which could invite further regulatory scrutiny. With that in mind we expect to see continued focus into next year on how to improve both secondary and primary market business to reverse the recent liquidity squeeze and encourage more inward investment.”
Traders could well see a real disruption to equity markets activity, in terms of available liquidity, as a consequence of the US changes to settlement.
“People don’t always think about the way that settlement affects market liquidity,” says Canwell. “We saw that have an effect to some extent when CSDR went live, particularly in the exchange traded fund (ETF) space. ETFs are already more prone to settlement fails than cash equities so anything that can lead to an increase in settlement fails is going to be a challenge. A market maker could previously buy and sell an EU and US security and know they settle on the same day. Now there’s a one-day funding mismatch that’s going to mean that they’re not going to want to take on as much risk and they’re not going to be offering as competitive prices. I think we’ll see wider spreads and less size available on the touch. I think it will be pretty significant.”
Buagh concurs, noting, “The shift to T+1 in the United States and its repercussions on the United Kingdom and Europe will remain a prominent topic. Hopefully enhanced post-trade efficiencies and initial regulatory leniency will ease the transition, although potential implications concerning funding costs and liquidity are still very much on the horizon.
Regulatory, risk and compliance analysts will have plenty to deal with from ongoing consultations as well as responses to global changes.”
“If you leave aside the move to T+1, 2024 is going to get very busy from a consultation point of view in Equities markets, especially in EMEA,” says Visconti. “The UK will continue at pace reviewing its regulatory review, while the EU will get to work on all the technical details to implement the next MiFID. Although it is important to an extent to limit the divergence between the EU and UK, 2024 could be a great opportunity to fix and lift some of the barriers Geographical Europe face to attract investors.”
A big part of that will be the development of the consolidated tape in both the UK and the European Union regulatory regions, Visconti says.
“By May 2024, we should see a much more accurate tape in the UK, the FCA having removed from mandatory publication for most of the ‘technical’ trades, which are neither accessible nor addressable,” she says. “This should give us not only a much better appreciation of price forming volumes but also a much better understanding of the close volumes. More work is required in the EEA to achieve the same functional outcome and this is something the FIX protocol is working hard on. I think this is a major step because improving data quality is the first step to understand how we should shape the next reform and in turn bring more growth into European Capital Markets.”
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