New Settlement Cycle for U.S. Securities Causes Concern for International Fund Managers

The impending shift to a shorter settlement cycle for U.S. securities is creating challenges for international fund managers as they prepare to adapt to the new regulations. The change, aimed at reducing risks associated with unsettled trades during periods of market volatility, will require securities transactions to settle one business day after the trade, known as T+1, instead of the current T+2 cycle.

Scheduled to take effect on May 28 in the U.S., the move diverges from the standard T+2 settlement cycle observed in much of the rest of the world. As a result, market participants are reevaluating their processes to mitigate the risk of transaction failures and increased trading expenses.

Ben Springett, head of European electronic and program trading at Jefferies, noted that the transition to the shorter settlement cycle will come with added costs. Fund managers may need to maintain larger cash balances to cover potential gaps and mismatches, potentially impacting fund performance.

The Depository Trust & Clearing Corporation (DTCC), along with industry bodies such as the Investment Company Institute (ICI), has been collaborating to prepare for the change. While leaders like Tom Price, managing director at Securities Industry and Financial Markets Association, acknowledge the complexities of the initiative, they also see potential risk reduction and operational benefits for the industry.

However, concerns have been raised regarding the impact on foreign exchange (FX) trades and liquidity, particularly for foreign investors who need to buy dollars to fund U.S. securities transactions. The European Funds and Asset Management Association (EFAMA) has highlighted the systemic risk posed to Europe by the faster U.S. settlement cycle, urging for adjustments to accommodate non-U.S. market participants.

The shortened settlement cycle could also lead to increased demand for short-term financing and disrupt global index funds with mismatched settlement cycles. As fund managers and industry experts navigate these changes, the financial sector is bracing for a shift that may ripple through various aspects of the market.

By enforcing a T+1 cycle, the U.S. aims to enhance efficiency and reduce risks in securities trading, but the adjustment process poses significant challenges for international fund managers and market participants.


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