When the U.S. stock markets reopen next Tuesday following the extended Memorial Day weekend, everything may appear unchanged initially. Nonetheless, a significant, long-anticipated, and divisive adjustment is set to occur: reducing the time needed to process each transaction in American securities to just one day.
The move to T+1 securities settlement is set for May 28, 2024. American stock exchanges and many financial firms are gearing up for this change and the possible challenges it may entail.
What is T+1 Securities Settlement?
The move to T+1 securities settlement is set for May 28, 2024. American stock exchanges and many financial firms are gearing up for this change and the possible challenges it may entail.
The T+1 cycle applies to a variety of securities such as stocks, corporate bonds, municipal bonds, ETFs, certain mutual funds, and other exchange-traded securities. With T+1, when you purchase or sell a security on a specific day like Tuesday, the transaction should be completely settled by the following day, Wednesday.
Shifting to a T+1 settlement cycle is anticipated to decrease counterparty risk and boost automation in post-trade operations. Nonetheless, this transition will necessitate market players to revise their systems and procedures to adhere to the shorter timeframe. Industry experts caution that it could introduce new risks not encountered before.
Cboe Ready for Transition to T+1
The Cboe US Equities Exchange announced its readiness for the transition to the shortened standard settlement cycle, effective May 28, 2024.
The Cboe U.S. Equities Exchanges will reduce the timeframe for transactions in stocks going ex-dividend or ex-rights, as detailed by the exchange.
Currently, Cboe commences trading ex-dividends a day before the record date for dividends or other distributions. The new settlement cycle will align ex-dividend trading with the record date.
While NYSE and Nasdaq have not released comparable statements, they are likely gearing up for the transition or may already be prepared for it.
Financial regulatory organizations in the US have also expressed readiness in this regard. For instance, FINRA announced the implementation of relevant rules by the end of February 2024.
FX Risks Loom
The shift to a T+1 settlement cycle in the US securities market has sparked worries regarding foreign exchange (FX) risks, especially for the numerous foreign investors active on Wall Street. These investors hold a collective capital of $25 trillion. Juggling the FX cycle across different global markets becomes trickier due to time zone disparities under the updated settlement system.
A year ago, the FX division of the Global Financial Markets Association released a report on “FX Considerations for T+1 US Securities Settlement.” The report emphasized the higher risk when transaction funding relies on timely FX settlement. This risk arises from the need to match, confirm, and pay trades within local currency cut-off times, which can be challenging with the faster settlement cycle.
End of trading week’s becoming a concern
As the trading week wraps up, concerns arise due to various factors converging. The US, European, and Asian markets winding down led to a significant drop in liquidity in currency markets. This decrease in available funds is worsened by the weekend closure of these markets, limiting flexibility for any sudden adjustments needed.
The combination of these factors has raised concerns about how the T+1 settlement cycle could affect FX risk management and the ability of market participants to obtain funding promptly for their trades.