When the
stock markets in the United States open next Tuesday after the long Memorial
Day weekend, everything will look the same at first glance. However, a very
important, long-announced, and, according to many, controversial change will
take place: halving the time to complete every transaction on American
securities to a single day.
The
transition to T+1 securities settlement will officially occur on May 28, 2024,
and American stock exchanges and numerous financial firms are preparing for it
and the potential complications it may bring.
What is T+1 Securities
Settlement?
T+1
securities settlement refers to shortening the standard settlement cycle for most securities transactions from two
business days after the trade date (T+2) to one business day after the trade
date (T+1).
The T+1
cycle will apply to stocks, corporate and municipal bonds, ETFs, certain mutual
funds, and other exchange-traded securities. Under T+1, if you buy or sell a
security on a Tuesday, for example, the transaction must be fully settled by
the end of the day on Wednesday.
The move to
T+1 is expected to reduce counterparty risk and potentially increase automation
Automation
Automation is defined as the procedure of making an apparatus, a process, or a system to operate by mechanical or electronic devices that replace human labor. Additionally, automation is also sometimes referred to as mechanization or robotization. For example, employees have many costly needs, including government regulations. However, robotic workers don’t need much other than some routine maintenance and the occasional bug fix for an equipment malfunction or software bug. There is no overtime
Automation is defined as the procedure of making an apparatus, a process, or a system to operate by mechanical or electronic devices that replace human labor. Additionally, automation is also sometimes referred to as mechanization or robotization. For example, employees have many costly needs, including government regulations. However, robotic workers don’t need much other than some routine maintenance and the occasional bug fix for an equipment malfunction or software bug. There is no overtime
Read this Term
in post-trade processes. However, it will require market participants to update
systems and processes to comply with the compressed timeframe, and according to
industry representatives, it may be associated with new, previously unknown
risks.
The U.S. transition to a T+1 settlement cycle is only two weeks away, and DTCC's latest analysis shows that in April 2024, 83.5% of transactions were affirmed by the DTC cutoff time of 9:00PM ET on trade date.
Read more: https://t.co/7hSXDu8KTJ pic.twitter.com/kkcagYCIs4
— DTCC (@The_DTCC) May 13, 2024
It is no
surprise that the largest banking institutions, such as Societe Generale, UBS, Citi, and HSBC Holdings, are transferring staff, hiring new people, and building entirely new systems to cope with this significant
change.
The US
stock exchanges, which will be the first responsible for implementing and
maintaining the changes, are also preparing for the transition.
Cboe Ready for Transition
to T+1
In its latest communication, the Cboe US Equities Exchange informed that it is ready for
the transition to the shortened standard settlement cycle, effective May 28,
2024.
"The
Cboe U.S. Equities Exchanges will also shorten the period for which
transactions in stocks are ex-dividend or ex-rights," the exchange
explained.
Presently,
Cboe starts trading ex-dividends one day prior to the record date for dividends
or other distributions. With the introduction of the new settlement cycle,
ex-dividend trading will occur on the same day as the record date.
Although
the other major American exchanges, NYSE and Nasdaq, have not yet issued
similar statements, they are certainly also preparing to transition or are
already ready to do so.
Self-regulating financial organizations in the US also announced such readiness. One of them is FINRA, which reported the adoption of appropriate rules at
the end of February 2024.
FX Risks Loom
The
transition to a T+1 settlement
Settlement
Settlement in finance refers to the process when a buyer makes payment and receives the agreed-upon services or goods. The term is used on exchanges such as New York Stock Exchange (NYSE) when security changes hands. When the asset is transferred and placed in the new buyer's name, it is considered settled. This process could take a few hours or several days after a trade is made. It depends on the clearance process. In the United States, the settlement date for marketable stocks is usually 2
Settlement in finance refers to the process when a buyer makes payment and receives the agreed-upon services or goods. The term is used on exchanges such as New York Stock Exchange (NYSE) when security changes hands. When the asset is transferred and placed in the new buyer's name, it is considered settled. This process could take a few hours or several days after a trade is made. It depends on the clearance process. In the United States, the settlement date for marketable stocks is usually 2
Read this Term cycle in the US securities market has raised
concerns about potential foreign exchange (FX) risks, particularly for the
millions of foreign investors trading on Wall Street, whose capital now amounts
to $25 trillion. The time zone differences between various global markets make
managing the FX cycle more challenging under the new settlement regime.
Nearly a
year ago, the FX division of the Global Financial Markets Association published
a report titled "FX Considerations for T+1 US Securities Settlement,"
highlighting the increased risk of transaction funding dependent on FX
settlement not occurring in time. This is due to the requirement for matching,
confirmation, and payment of trades to be completed within local currency
cut-off times, which may be more difficult to achieve with the faster
settlement cycle.
The end of
the trading week has become a significant concern due to the
convergence of several factors. As the US, European, and Asian markets prepare
to wind down their activities, liquidity in the currency markets tends to
diminish drastically. This reduction in available funds is further compounded
by the fact that these markets remain closed over the weekend, leaving little
room for maneuver should any last-minute adjustments be required.
This
confluence of factors has led to heightened concerns about the potential impact
of the T+1 settlement cycle on FX risk management and the ability of market
participants to secure the necessary funding for their trades in a timely
manner.
When the
stock markets in the United States open next Tuesday after the long Memorial
Day weekend, everything will look the same at first glance. However, a very
important, long-announced, and, according to many, controversial change will
take place: halving the time to complete every transaction on American
securities to a single day.
The
transition to T+1 securities settlement will officially occur on May 28, 2024,
and American stock exchanges and numerous financial firms are preparing for it
and the potential complications it may bring.
What is T+1 Securities
Settlement?
T+1
securities settlement refers to shortening the standard settlement cycle for most securities transactions from two
business days after the trade date (T+2) to one business day after the trade
date (T+1).
The T+1
cycle will apply to stocks, corporate and municipal bonds, ETFs, certain mutual
funds, and other exchange-traded securities. Under T+1, if you buy or sell a
security on a Tuesday, for example, the transaction must be fully settled by
the end of the day on Wednesday.
The move to
T+1 is expected to reduce counterparty risk and potentially increase automation
Automation
Automation is defined as the procedure of making an apparatus, a process, or a system to operate by mechanical or electronic devices that replace human labor. Additionally, automation is also sometimes referred to as mechanization or robotization. For example, employees have many costly needs, including government regulations. However, robotic workers don’t need much other than some routine maintenance and the occasional bug fix for an equipment malfunction or software bug. There is no overtime
Automation is defined as the procedure of making an apparatus, a process, or a system to operate by mechanical or electronic devices that replace human labor. Additionally, automation is also sometimes referred to as mechanization or robotization. For example, employees have many costly needs, including government regulations. However, robotic workers don’t need much other than some routine maintenance and the occasional bug fix for an equipment malfunction or software bug. There is no overtime
Read this Term
in post-trade processes. However, it will require market participants to update
systems and processes to comply with the compressed timeframe, and according to
industry representatives, it may be associated with new, previously unknown
risks.
The U.S. transition to a T+1 settlement cycle is only two weeks away, and DTCC's latest analysis shows that in April 2024, 83.5% of transactions were affirmed by the DTC cutoff time of 9:00PM ET on trade date.
Read more: https://t.co/7hSXDu8KTJ pic.twitter.com/kkcagYCIs4
— DTCC (@The_DTCC) May 13, 2024
It is no
surprise that the largest banking institutions, such as Societe Generale, UBS, Citi, and HSBC Holdings, are transferring staff, hiring new people, and building entirely new systems to cope with this significant
change.
The US
stock exchanges, which will be the first responsible for implementing and
maintaining the changes, are also preparing for the transition.
Cboe Ready for Transition
to T+1
In its latest communication, the Cboe US Equities Exchange informed that it is ready for
the transition to the shortened standard settlement cycle, effective May 28,
2024.
"The
Cboe U.S. Equities Exchanges will also shorten the period for which
transactions in stocks are ex-dividend or ex-rights," the exchange
explained.
Presently,
Cboe starts trading ex-dividends one day prior to the record date for dividends
or other distributions. With the introduction of the new settlement cycle,
ex-dividend trading will occur on the same day as the record date.
Although
the other major American exchanges, NYSE and Nasdaq, have not yet issued
similar statements, they are certainly also preparing to transition or are
already ready to do so.
Self-regulating financial organizations in the US also announced such readiness. One of them is FINRA, which reported the adoption of appropriate rules at
the end of February 2024.
FX Risks Loom
The
transition to a T+1 settlement
Settlement
Settlement in finance refers to the process when a buyer makes payment and receives the agreed-upon services or goods. The term is used on exchanges such as New York Stock Exchange (NYSE) when security changes hands. When the asset is transferred and placed in the new buyer's name, it is considered settled. This process could take a few hours or several days after a trade is made. It depends on the clearance process. In the United States, the settlement date for marketable stocks is usually 2
Settlement in finance refers to the process when a buyer makes payment and receives the agreed-upon services or goods. The term is used on exchanges such as New York Stock Exchange (NYSE) when security changes hands. When the asset is transferred and placed in the new buyer's name, it is considered settled. This process could take a few hours or several days after a trade is made. It depends on the clearance process. In the United States, the settlement date for marketable stocks is usually 2
Read this Term cycle in the US securities market has raised
concerns about potential foreign exchange (FX) risks, particularly for the
millions of foreign investors trading on Wall Street, whose capital now amounts
to $25 trillion. The time zone differences between various global markets make
managing the FX cycle more challenging under the new settlement regime.
Nearly a
year ago, the FX division of the Global Financial Markets Association published
a report titled "FX Considerations for T+1 US Securities Settlement,"
highlighting the increased risk of transaction funding dependent on FX
settlement not occurring in time. This is due to the requirement for matching,
confirmation, and payment of trades to be completed within local currency
cut-off times, which may be more difficult to achieve with the faster
settlement cycle.
The end of
the trading week has become a significant concern due to the
convergence of several factors. As the US, European, and Asian markets prepare
to wind down their activities, liquidity in the currency markets tends to
diminish drastically. This reduction in available funds is further compounded
by the fact that these markets remain closed over the weekend, leaving little
room for maneuver should any last-minute adjustments be required.
This
confluence of factors has led to heightened concerns about the potential impact
of the T+1 settlement cycle on FX risk management and the ability of market
participants to secure the necessary funding for their trades in a timely
manner.
