Daily Management Review

Expectations As The US Moves Towards Faster Stock Settlement


Expectations As The US Moves Towards Faster Stock Settlement
Following the implementation of a new Securities and Exchange Commission (SEC) regulation in February 2023, the settlement period for U.S. stocks, corporate municipal bonds, and other securities will be halved to one day, or T+1. This will cause a stir in the U.S. markets on Tuesday, May 28.
When the seller is paid and the buyer obtains the security, a trade settlement, opens new tab, takes place. The Depository Trust Company (DTC), a division of the Depository Trust and Clearing Corporation, is in charge of this last phase.
Faster settlement is anticipated by regulators to lower risk and boost efficiency in the world's main markets by enabling investors to receive their money and securities sooner.
There may be delays before investors receive their money or assets at the moment because deals take two days to complete.
The "meme stock" GameStop caused a trading frenzy in 2021, which brought attention to the need of lowering counterparty risk as well as enhancing capital efficiency and liquidity in securities transactions. According to SEC Chair Gary Gensler, the modification would strengthen the resiliency, timelyness, and orderliness of the American market infrastructure.
Market players will be getting ready to start settling deals on May 28 in one day as opposed to two during the next weekend. This weekend will be crucial even though they have been trying speedier settlement since at least August 2023.
To keep an eye on the implementation and share any problems, a virtual command centre has been established. Multiple daily calls will be attended by more than 1,000 persons, according to Tom Price, managing director of trade group Sifma.
It's amazing.
Since the DTCC provides clearing and settlement services for Wall Street, its conversion to T+1 will be a key component of the move towards speedier settlements. However, all market participants—from banks to asset managers and custodians—would need to make adjustments.
Is the United States the first nation to go to t+1? No. After the country's Securities and Exchange Board finished its phased-in shift in January 2023, trades in India are settled one day after the deal.
India is now aiming to achieve same-day settlement, following China, where cash settlement is T+1 and stock settlement is T+0.
On May 27, one day ahead of the U.S., Canada, Mexico, and Argentina will also switch to a one-day settlement system.
According to Alejandro Félix, president of the Administration Committee of the Mexican Association of Stock Institutions, Mexico chose to accelerate T+1 in order to maintain its link with the United States.
By the end of 2027, the British stock markets want to switch to T+1, and the European Union has stated that it intends to follow suit, but the exact date has not yet been disclosed.
Less time will allow financial institutions to raise funds for stock purchases, take back shares that have been lent out, or correct transaction faults, thus increasing the likelihood of settlement failures and driving up transaction costs. For example, the foreign currency market still settles in two days.
Market players anticipate a brief rise in transaction failures as they get used to quicker settlements. According to Sifma, this occurred in September 2017 when the settlement term was shortened from three to two days.
According to the Securities and Exchange Commission "a shorter settlement cycle may lead to a short-term uptick in settlement fails, opens new tab and challenges to a small segment of market participants."
According to a poll conducted by research company ValueExchange, market participants anticipate that the transaction fail rate will rise from 2.9% to 4.1% following T+1 adoption. According to Price, Sifma anticipates a little increase in the failure rate that will be promptly rectified.