The recent shift to faster trade settlements in the U.S. and other countries has been met with a mix of optimism and challenges. On Tuesday, U.S. trading moved to a one-day settlement cycle (T+1) from the previous two-day cycle, marking a significant change in the market infrastructure. While market participants have reported a generally smooth transition, there have been some processing bumps along the way. This article aims to analyze the impact of this transition and the challenges that have arisen.
Market participants, including the Securities Industry and Financial Markets Association (Sifma) and the Investment Company Institute, have expressed optimism about the progress of the transition. The first day of trading under T+1 settlement was described as smooth by industry experts. However, concerns have been raised about the potential for increased trade failures and other hiccups as firms adjust to the new settlement regime.
An early indicator of the transition’s success has been the data on trade affirmations, which indicate how likely trades are to be successfully settled. The Depository Trust and Clearing Corporation reported a high affirmation rate following the transition, suggesting a positive outcome for the settlement process. Settlement, the process of transferring securities or funds after a trade agreement, is a crucial step in the trading cycle. Delays in processing and preparing trades for settlement have been reported, but efforts have been made to address these issues promptly.
With the shift to T+1 settlement, market participants expect to see an increase in trade failures as the industry adjusts to the faster cycle. Research firms have projected a rise in the fail rate after the implementation of T+1, indicating a period of adjustment for market participants. The faster settlement cycle is expected to bring benefits such as reduced exposure of portfolios and increased transaction volumes, as seen in Mexico.
Canada, Mexico, Argentina, and Jamaica have also implemented T+1 changes successfully, despite some isolated delays. The response from these countries has been generally positive, with market participants acknowledging the need for modernization in settlement mechanisms. The transition to faster trade settlements reflects a broader trend towards increased efficiency and resilience in financial markets.
The transition to faster trade settlements represents a significant milestone in the evolution of financial market infrastructure. While the shift to T+1 settlement has been largely smooth, challenges such as processing delays and increased trade failures are expected as the industry adjusts to the new cycle. Market participants will need to adapt to these changes and address any issues that arise to ensure the continued stability and efficiency of the trading process.