The looming introduction of a shorter settlement cycle for U.S. securities, moving from T+2 to T+1 on May 28, is causing significant operational and financial concerns for international fund managers. This change, prompted by the 2021 GameStop stock plunge, aims to reduce risks in unsettled trades but diverges from the global standard of T+2, raising issues around increased cash holdings and foreign exchange risks for funds outside the U.S.
Operational Adjustments and Financial Implications
International funds are bracing for increased operational complexity and financial strain as the U.S. shifts to a T+1 settlement cycle. This move requires funds to hold larger cash balances to bridge potential settlement gaps, potentially affecting fund performance. The transition also increases the risk of transaction failures and higher trading expenses, prompting funds to rethink processes to mitigate these risks. Furthermore, the change is expected to cause dislocation in foreign exchange trades, as foreign investors will need to navigate tighter deadlines for securing U.S. dollars for transactions.
Strategic Responses and Industry Preparations
Market participants, including custodians, traders, and consultants, have been reevaluating their operational strategies to comply with the new settlement cycle. Some are considering setting up U.S. outposts or adjusting working hours to align with U.S. market times. Additionally, there is a push for extending the cut-off time for the CLS (Continuous Linked Settlement) system, which is crucial for settling multi-currency transactions. Despite these challenges, industry bodies like the Depository Trust & Clearing Corporation (DTCC) and the Investment Company Institute (ICI) are working towards preparing the market, emphasizing the long-term benefits of risk reduction and operational efficiencies.
Global Market Impact and Future Considerations
The shortened settlement cycle in the U.S. may also affect liquidity in equity markets, as it could limit the ability to recall loaned securities to short sellers, impacting overall market liquidity. Moreover, global index funds and exchange-traded funds with mixed asset settlement cycles could face disruptions. The industry-wide shift towards T+1 in the U.S. underscores the need for increased automation and the evaluation of cross-border settlement practices, highlighting the global implications of this change on international funds and the broader financial ecosystem.
Source: BNN
