Australasian stock exchanges are gearing up for a change of pace as the world’s largest equity market readies to halve settlement time next week.
Both the NZX and ASX are considering a shift to ‘T+1’ trading to align with the new speed limit for North American bourses set to come into play on May 27 and 28.
US, Canadian and Mexican stock exchanges will all accelerate from the current two-day settlement period for equities to T+1 next week in a move that has global implications for fund managers, brokers, investors and back-office service providers.
The intertwined Australasian share market operators moved in unison to cut a day off settlement times in 2016 when switching-up to T+2 and – prompted by the North American change – have signalled a synchronised approach would be necessary for further speed increases.
A NZX spokesperson said the group “has been working internally on the technical and structural changes that would be required for T+1”.
“We have also been engaging with ASX because, as with the move to T+2, the two exchanges moving together is efficient for both markets,” the spokesperson said. “… What is important is that NZX moves in sync with ASX.”
The NZX has surveyed local market participants on potential faster settlement times while also sounding out regulators on required rule changes.
In a formal consultation paper released last month, the ASX also highlights the need for trans-Tasman collaboration on any T+1 transition.
“ASX has received strong feedback to date regarding the benefits of alignment of settlement cycles between Australia and New Zealand, particularly for dual listed securities and noting the two hour time difference between the countries,” the consultation paper says.
The North American jump to T+1 – a level already achieved or bettered in India and China – may force the ASX and NZX to follow suit, particularly as the UK will adopt the faster settlement times by 2027 with Europe also consulting on a similar change.
However, the ASX paper notes that “a move from T+2 to T+1 is likely to be more significant and challenging than the move from T+3 to T+2” for the Australasian operators.
“Shortening settlement cycles by one day necessitates substantial investment in technology, process improvement, workforce training and potential increases in workforce size,” the consultation paper says. “This involves automating manual tasks, streamlining time-intensive processes, and enhancing data processing speed throughout the settlement cycle; any of which could also impact operational risk for aging technology, tools, platforms and systems.
“… The impact of these expenditures varies across the market. For example, while brokers and custodians might offset these costs against the future capital and funding advantages of T+1, fund managers and their clients (asset owners or wealth clients) may not see equivalent financial returns from their T+1 expenditure.”
Regardless of whether the ASX and NZX adopt T+1 (a decision is expected in November, according to the Australian paper), the North American accelerated settlement times will impact Australasian investors and fund managers with exposure to US, Canadian and Mexican equities.
According to a guide produced by global custodian BNP Paribas Securities Services, “the move to T+1 in the US may further increase the complexity that asset managers of non-US registered funds face already in managing their liquidity, due to differences in the settlement cycle between fund liabilities and assets”.
Iain Martin, BNP Paribas Securities Services head of NZ, said the custodian has been working with local fund managers and asset owners to prepare for the T+1 blast-off in the US etc.
Martin said the NZ market seems well-positioned to handle the new settlement regime with most managers aware of the different order deadlines and funding requirements.
Nonetheless, the custodian notes in the guide that the T+1 regime “may have a significant impact on the entire chain of processes from front to back office, and beyond fund administration, including for investors and distributors”.
The ASX paper also highlights the faster T-time will have particular consequences for exchange-traded funds (ETFs) due to settlement mismatches between underlying securities.
If Australasian exchanges retain their current settings “there will be a misalignment between the inflow of the ETF unit creation proceeds (T+2 in Australia) and the settlement period for the acquired securities in the basket (as of end of May 2024, T+1 in US)”, the consultation says.
But the ASX paper says accelerating to T+1 might also put pressure on ETFs with possible increases in costs and fees.
The timeline for any change – if approved – to settlement periods in Australia and NZ may hinge, too, on a planned upgrade to the aging ASX CHESS system that has been restarted following a disastrous six-year effort to build a blockchain-based replacement.
Meanwhile, the Depositary Trust & Clearing Corporation (DTCC) said in a release last week that more than 83.5 per cent of order “affirmations” in the had been placed within the new daily deadline of 9pm.
“This represents a more than 8-percentage point increase from March’s 74.95% rate, significant progress as the industry moves closer to implementation,” the DTCC report says.
DTCC handles the bulk of post-trade work in US and other markets.