Caroline Mandl
NEW YORK (Reuters) – U.S. markets are set for a shock on Tuesday, May 28, when settlement times for U.S. stocks, corporate municipal bonds and other securities are cut in half to one day, or T+1, following new legislation. new Securities and Exchange Commission (SEC) rule in February 2023.
Here’s what to expect:
WHAT IS LOCATION?
Trade settlement occurs when the buyer receives collateral and the seller receives payment. This final step is carried out by the Depository Trust Company (DTC), a subsidiary of the Depository Trust and Clearing Corporation.
WHAT DOES SPEEDING SETTLEMENT MEAN FOR MARKETS?
Regulators hope the faster settlement process will reduce risk and improve efficiency in the world’s biggest markets as investors get their money and securities faster. Currently, since trades take two days to complete, disruptions may occur before investors receive their money or securities.
The trading frenzy surrounding the “meme stock” GameStop (NYSE:) in 2021 has highlighted the need to reduce counterparty risk and improve capital efficiency and liquidity in securities transactions. SEC Chairman Gary Gensler said these changes will make the U.S. market infrastructure more resilient, timely and orderly.
HOW WILL THIS BE IMPLEMENTED?
This coming weekend, market participants will be preparing to begin settling trades in one day on May 28 instead of two. Although they have been testing a faster settlement since at least August 2023, this weekend will be decisive.
A virtual command center was created to monitor implementation and report potential problems. More than 1,000 people will join the daily calls, according to Tom Price, managing director of trade association Sifma.
Converting the Depository Trust and Clearing Corporation (DTCC) to a T+1 system will be a central part of the shift to faster settlements as it provides clearing and settlement services to Wall Street, but all market participants will have to adapt, starting with banks to asset managers and custodians.
IS THE USA THE FIRST COUNTRY TO MOVED TO T+1?
No. Trades in India are settled the day after the trade, after the country’s Securities and Exchange Board completed a phased transition in January 2023. Now India is targeting same-day settlement, joining China where equity settlement is T.+0 and T+1 for cash.
Canada, Mexico and Argentina will also move to a one-day settlement on May 27, a day before the US.
Alejandro Felix, president of the administrative committee of AMIB (Mexican Association of Fund Institutions), said Mexico decided to accelerate T+1 to maintain correlation with the United States.
WHO’S NEXT?
British stock markets are planning to move to T+1 by the end of 2027, while the European Union has said it also wants to follow the US lead, but no timeframe has been announced.
WHAT ARE THE PROBLEMS?
Financial firms will have less time to accumulate dollars to buy shares, call back borrowed shares or correct transaction errors, which could increase the risk of settlement failures and raise transaction costs. For example, the foreign exchange market still stabilizes within two days.
WHAT CAN GO WRONG?
As market participants adjust to faster settlements, they expect the temporary increase in trading volume to fail. According to Sifma, this happened in September 2017, when the settlement period was reduced from three to two days.
The Securities and Exchange Commission said that “a shorter settlement cycle may result in a short-term increase in settlement failures and problems for a small segment of market participants.”
Research firm ValueExchange found in a survey that market participants expect the trading failure rate to increase from 2.9% to 4.1% after the implementation of T+1. Price said Sifma expects a minimal increase in failures to be resolved quickly.
(This story has been rewritten to correct typos)