Index provider MSCI has urged developed world stock markets to move in lock-step to a one-day settlement cycle as US and Canadian exchanges ready for a quickening next May.
The MSCI 2023 market classification update warns out-of-synch settlement times could prove disruptive for investors.
“As this change is set to occur in the US and Canada, global alignment across Developed Markets would be highly beneficial, especially during global index rebalances, to reduce frictions and prevent overdrafts, particularly considering current high interest rates,” the MSCI note says.
“… An ideal scenario would involve a coordinated transition across Developed Markets with the EU, UK and Japan following the shift. Conversely, it is expected that Emerging Markets delay in transitioning to T+1 until the lack of flexibility in amending cycles and the requirement for pre-funding in certain markets is addressed.”
Despite the concern about emerging markets both India and China have already adopted one-day share settlement times with the former completing the move from this January.
According to the MSCI report, Indian share markets shifted smoothly from the previous two-day settlement period to T+1 in a phased approach.
“After operational amendments from the Securities and Exchange Board of India (SEBI), international institutional investors reported a transition to a shorter cycle, with no issues,” the index firm says.
The MSCI note says T+1 trading can reduce risk, enhance investor protection and boost market “operational and capital efficiency”. But faster settlement times may also introduce new risks such as tougher pre-funding requirements and operational costs if poorly executed.
“The alignment of settlement systems is critical for maintaining the stability of securities markets and protecting investors’ assets,” the note says.
“… MSCI continues to closely monitor these developments and welcomes feedback from market participants on the shortening of the settlement cycle in equity markets and the impact of settlement-misalignment across different markets.”
The NZX adopted T+2 trading in 2016, one year ahead of US share markets.