Market participants, such as banks, custodians, asset managers and regulators will be working over the coming weekend to ensure a smooth switch. A virtual command center has been created with over 1,000 participants who will join calls to discuss the transition, the Securities Industry and Financial Markets Association (Sifma) said.
On Monday, which is a U.S. holiday, all eyes will be on Canada, Mexico and Argentina. Any hiccups there could impact the U.S., said Christos Ekonomidis, T+1 program director at BNY Mellon.
On Wednesday, there will be another big test for the market as trades executed both on Friday, when T+2 was still in place, and on Tuesday, the first day of T+1, will be settled, leading to an expected rise in volume.
More trade failures are expected initially, even though DTCC and market participants have been conducting a series of tests, opens new tab for months. A rise in failure was observed in 2017, when the U.S. moved the settlement period to two from three days.
It’s perfectly normal that we’ll see some sort of small change in settlement rates… but we expect that settlement rates will quickly return to normal,” said Rondini.
On average, market participants expect the fail rate to increase to 4.1% after T+1 implementation from 2.9% currently, a survey, by research firm ValueExchange showed. Sifma expects the fail rate increase to be minimal and the SEC said there may be a short-term uptick in it.
Brian Steele, president of clearing and securities services at DTCC, said more than 90% of the industry has been participating in the process since testing started in August 2023. There is still “a deep level of muscle memory” from the industry’s move to T+2 in 2017, he said.
RISK/REWARD
Trade bodies say the shift will mitigate systemic risk because it reduces counterparty exposure, improves liquidity and decreases margin and collateral requirements.
Still, some market participants are concerned that the change could transfer risks to other parts of the capital markets such as trade-related foreign exchanges to fund transactions and securities lending.
Foreign investors, who hold nearly $27 trillion, in U.S. stocks and bonds, must buy dollars to trade these assets. They previously had a whole day to source the currency.
Foreign investors, who hold nearly $27 trillion, in U.S. stocks and bonds, must buy dollars to trade these assets. They previously had a whole day to source the currency.
Market participants may have to rely on overnight funding markets to bridge liquidity gaps caused by different asset settlement timings, which could be costly given that short-term financing rates exceed 5%.
Gerard Walsh, who leads Northern Trust’s Global Capital Markets Client Solutions group, said managers need to be aware of the potential range of solutions available.
“I don’t think any of that fleshes itself out on week one,” Walsh said.