Industry players and market participants are readying themselves for the shortening of the settlement cycle from two days to one in the US. New data suggests that currently over a third of trades would fail if the switch was flipped tomorrow. Now, with fewer than 100 days left to prep, is the industry going to be ready in time?
“The DTCC testing appears to show the market is well-placed for the implementation of T+1 with 100 days to go,” James Pike, ex-EMEA Head of client operations at Morgan Stanley, now head of business development at Taskize.
“However, a spike in trade settlement fails under T+1, which could be triggered by a sudden increase in volatility in US equity and fixed income markets, will show who is left unprepared akin to being caught out in a hurricane in a dinghy bailing water out when looking ahead to predict the outlook and preparing for the worst would have been more appropriate,” Pike said.
“The market should be preparing far more actively and looking to implement solutions to enable accelerated matching, improved exception handling to drive the management and prevention of fails and the preservation of the existing performance levels at a minimum,” Pike added.
Baillie Gifford’s head of trading Adam Conn told BEST EXECUTION: “I can only comment about our preparations, and we believe at Baillie Gifford we are on track to be ready. With the support of colleagues across the firm, our trading and settlement desks in New York went live in January and are working well.”
While the reduction in settlement time aims to cut risks associated with unsettled securities trades, it is hoped the shorter exposure period will contribute to overall market stability. But how will it impact other markets, such as FX? Basu Choudhury, head of partnerships and strategic initiatives at OSTTRA, believes this will be ringing alarm bells for those having to conduct and settle FX trades within a quicker than T+1 time frame in order to fund their trades of US securities.
“Take a Singapore based investment manager, already faced with logistical time zone constraints, looking to sell a large number of US stocks. From an FX perspective, in order to pay for the stocks, the investment manager will need to convert their cash Singapore dollars into US dollars within a compressed settlement timeframe,” said Choudhury. “Therefore, to mitigate the risk of failing to settle due to not having enough dollars to pay for the stocks, investment managers need to have the right connectivity to capture, match and confirm the trades.”
Will Europe be following in the SEC’s footsteps? The European Fund and Asset Management Association recently suggested there was “a compelling case” for the EU to move to T+1. Either way, firms based in Europe trading in US markets will be impacted by the change across the pond.
Vikas Srivastava, chief revenue officer, Integral: “As the T+1 deadline looms, tech leaders and traders are facing a race against time – quite literally. Asset managers in Europe and APAC trading in US markets, will need to settle both equities and FX trades in a compressed timeframe.”
“Banks can play a crucial role in supporting their clients to overcome these challenges. Banks servicing investment management clients have a chance to step up and seamlessly integrate their services into an asset managers workflow., thereby helping asset managers implement an automated workflow to meet the T+1 challenge,” Srivastava added.
©Markets Media Europe 2024
