Australasia-based investors might end up out of synch with North American markets after a landmark agreement by US and Canadian securities industries to cut settlement times in half by mid-2024.
Under the plan released last week both US and Canadian markets will move to a one-day settlement model from the current system that allows participants two days from the time of trade to square-up accounts.
A joint report published by the US Securities Industry and Financial Markets Association (SIFMA), the Investment Company Institute (ICI), and The Depository Trust & Clearing Corporation (DTCC) lays out a timeline to resolve the many technical issues required to meet the proposed ‘T+1’ standard.
However, in a release, ICI chief, Eric Pan, said upgrading to T+1 would “strengthen the financial system and offers tangible benefits to investors by reducing their risk exposure and enabling them to more quickly leverage investment opportunities”.
“Regulated funds are a primary source for daily trading transactions, occupying a prominent place at the intersection of trading and settlement,” Pan said. “This report provides a roadmap to help funds and their investors realize the benefits of moving to T+1, and we look forward to working with our members and the SEC on implementing the recommendations.”
While US industry groups initiated the trade-speed limit increase plan, the Capital Markets Association (CCMA) vowed to remain in lock-step with US counterparts.
According to a CCMA statement issued last week: “Keeping the settlement cycles of Canada and the U.S. aligned is a practice supported by economic studies, statements by regulatory policymakers, and the market experience of industry participants.
“Not aligning with a T+1 standard would mean Canadian firms would have to undertake systems and procedural changes to manage transactions for two different dates (domestic and cross-border), without achieving the benefits of T+1. As well, differing settlement cycles would cause investor confusion.”
The US securities industry joint report notes that a unilateral transition to T+1 could create some problems for investors in other markets.
“Foreign counterparties and investment vehicles with foreign securities exposure anticipate risk disruption given the asynchronous timing of open market hours across jurisdictions,” the report says. “Foreign investors may be required to pre-fund cash positions and securities prior to trading to meet contractual requirements and currency exchange (FX) could be problematic.”
Despite the significant upheaval to market practices required, SIFMA chief, Kenneth Bentsen Jr, said the two-year lead-in time should leave industry players plenty of time to adapt.
“As we saw during the industry move from T+3 to T+2 [in 2017], shortening the settlement cycle requires a collaborative effort from market participants across the industry, and the development of this report is a key step in making the vision of accelerated settlement a reality,” Bentsen said.
But T+1 likely marks the securities trading upper speed limit for some time to come, the report says, with a feasibility study ruling out early adoption of instantaneous settlement.
The US industry consultation concluded “that T+0 is not achievable in the short term given the current state of the settlement ecosystem”.
“A move towards a shortening of the settlement cycle to T+0, would require an overall modernization of current-day clearance and settlement infrastructure, changes to business models, revisions to industry-wide regulatory frameworks, and the potential implementation of real-time currency movements to facilitate such a change,” the report says.
The US joint industry group decision to set the 2024 deadline for T+1 trading followed consultation with “175 to 250 participants, across buy-side and sell-side, service, and system providers (inclusive of transfer agents), and custodian banks”, the paper says.