-- When US markets reopen next Tuesday after the long weekend, everything will likely seem normal. It’s only after the close and in the following days that any cracks are expected to appear.Even If Alito Is Right, the Upside-Down Flag Was WrongA spike in the number of failed trades, operational glitches and additional costs are among industry fears as the trading process for American securities accelerates, with the time allowed to complete every transaction halved to a single day.
That’s been whittled away over the years, and new SEC rules will slash the settlement time again on May 28 to one day. Across Wall Street and beyond, major banks, asset managers and an assortment of specialized service firms are bracing for the fallout. The world of finance and investment can be famously averse to change, with doomsayers dependably appearing whenever new rules are proposed. Yet in the case of T+1, the concerns go beyond one or two market Cassandras.
The T+1 regime increases the chance of failures because the compressed timeframe risks making errors more likely, while at the same time reducing the opportunity to correct them. Most crucially, it makes it harder for buyers and sellers to ensure their funds and securities are ready. Baillie Gifford has lobbied US regulators to get banks to extend their foreign-exchange trading hours and to continue providing liquidity until at least 6 p.m. in New York, five days a week. Since moving its staff in January, the firm has been trading as if T+1 was already in force to ensure everything goes smoothly, according to Adam Conn, head of trading.
The Foreign Exchange Professionals Association reckons the problem will also be acute at month- and quarter-ends and around national holidays, risking “significantly increased volatility and wider spreads.” Overseas investors acquiring US securities before a local holiday will effectively be faced with T+0 settlement.
The T+1 switch should alleviate such concerns because less collateral will be needed across a single day of risk. It may also improve domestic liquidity as cash in the market will be recycled faster. But it heaps pressure on the processes required to complete each transaction. In preparation for the switch, the DTCC has been conducting regular tests for nine months that will continue to the end of May. This has included gauging the industry’s ability to handle a “double-settlement day” like the one that will occur next Wednesday, when transaction volumes will surge as trades from Friday and next Tuesday will need to complete at the same time.
Adding to the pressure, the T+1 switch comes just days before MSCI Inc. indexes rebalance, with corresponding funds all over the world due to reshuffle holdings at the end of next week. For UBS Asset Management that’s the “largest trading date of the year,” according to Lynn Challenger, head of trading at the $1.7 trillion manager.
“The sellside thinks there will be issues, but it will be someone else’s fault,” said Jesse Forster, a senior analyst of market structure and technology at Coalition Greenwich. “We could be in for a lot of finger-pointing over the coming months.”TFSA: 3 Canadian Stocks to Hold for a Lifetime
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