T+1 will complicate things for international traders

The switch to T+1 settlement for transactions in US cash shares, corporate debt, and unit investment trusts will take place starting on May 28, 2024, according to the SEC’s final rules, which were adopted on February 15, 2023. The SEC suggests that one option to reduce market risk is to shorten the settlement cycle. In this article we are trying to have a look at how it can affect global trading.

Brian Collings, CEO of Torstone Technology, claims that even if the US and Canada are following the SEC’s ambitious implementation schedule exactly, there is still a great deal of uncertainty for global markets and global trading as a whole.

It’s impossible to exaggerate how important the switch to a T+1 settlement cycle will be for the international markets, he insisted.

“Capital markets around the world are just that—global. With enterprises scrambling to meet the deadline and operational systems and processes in desperate need of modernization and automation, the shift to T+1 may have a detrimental influence on investment flows, according to Collings.

He added that worldwide market participants need help with global coordination.

According to him, many businesses are concerned about the obstacles posed by time zones, and several US businesses have already taken steps to do so.

As North America switches to T+1, concerns like pre-funding, foreign exchange, and liquidity management will need to be properly taken into account.

He said that if they can’t swiftly adapt to the changes, “middle-tier and smaller, internationally-focused firms are concerned about losing business.”

The new settlement cycle rule would provide considerable challenges for global traders worldwide, according to Jeffrey O’Connor, Head of Market Structure, Americas at Liquidnet.

He said that because international accounts normally allocate only when T+1, delaying allocation, matching, and setup, there are a lot of challenges and questions that need to be addressed.

According to O’Connor, the following queries will need to be addressed:

1. Do operations transfer from the executing region to the local? If they make an allocation at 2 a.m. local time, do they execute it till 8 a.m. our time?
2. Is adding more customers to CTM the solution? A switch to Tag1-based FIX allocations?
3. Is an omnibus account required for every client?

O’Connor responded, “If the goal is to reduce risk, the ultimate move is to T+0,” in response to a question about how the rule will affect interactions with other markets that don’t function in T+1.

The broker/dealer is intended to carry the risk when executing a strategy in the swap market. Therefore, it will be fascinating to watch how reduced settlement affects that market, he continued.  

But from the perspective of fund management, the risk with brokers will undoubtedly be diminished, possibly denting what is a very sizable swaps market today.

In the meantime, Collings said that a recent webinar held by Torstone Technology in collaboration with Firebrand Research outlined some of the significant effects of the switch to a reduced settlement cycle in the US for the UK and other overseas markets.

The custodial community’s members noted that the US had made commendable steps to address the issue of time zones, he said.

Because of this, several smaller businesses have been pressured to move their operations hubs to the West Coast or have thought about doing so in order to serve their Asia Pacific clientele better, he continued.

The option of extending business hours is also being considered by some companies, particularly those without a “follow-the-sun” business model, according to Collings.

He claimed that in order to ease the US shift to T+1, which in turn will aid the global industry in moving towards prospective domestic moves elsewhere, operational and technology challenges, including manual processes and a lack of automation, must be solved as soon as feasible.

However, there is a bright spot among the difficulties. He said this action offers businesses a chance to improve operational effectiveness and lower risk.

The secret, according to him, is to embrace automation and digital transformation, which may improve middle- and back-office operations and give businesses a crucial competitive edge.

According to Laurence Jones, regional director for the Americas at FIX Trading Community, many of the activities between execution and final settlement involve manual labor, so meeting these deadlines might be easier by introducing higher levels of automation or adopting market standards.

He pointed out that the FIX Protocol is already extensively utilized to offer real-time messaging between institutional firms for a significant portion of their post-trade workflow and is, therefore, ideally positioned to assist firms in meeting the processing speed and accuracy requirements T+1 settlement requires.

He said participants in the FIX Trading Community continue to collaborate closely with other industry organizations as conversations develop and these regulatory frameworks are implemented, aiding in the definition of best practices for the sector.

According to Jones, the development of workflows and messages to provide real-time settlement status information for both cash and securities has reportedly been done more recently.

By easing the sharing of settlement status information among all relevant parties, he said, “This work is expected to conclude in Q2 2023 and will directly assist with T+1 implementation.”