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.
And it all faces an immediate stress test as some of the world’s major indexes rebalance or reveal planned reconstitutions before the end of this month. Institutions including Societe Generale SA, Citi, HSBC Holdings Plc, UBS Asset Management, Baillie Gifford and more say they’re either moving staff, reorganizing shifts or building new systems—and in some cases all three—in preparation for the switch.
The consensus view is that trade failures—when either a seller doesn’t deliver securities or a buyer fails to produce payment—are about to rise. The question is how large and persistent that uptick will be. Thanks to the T+1 shift and a 6 p.m. deadline at CLS Group , that will become a crucial period for asset managers seeking dollars to fund their US trades. But it also falls around the start of what are known as the witching hours in foreign-exchange circles because of the famous lack of liquidity.
Friday afternoon is emerging as a particular area of concern, because currency markets close on weekends, meaning liquidity is typically at its lowest just before the US joins Europe and Asia in clocking off. JPMorgan’s Brijen Puri, head of global FX services, said “neither the buyside or sellside really knows what will happen” in those periods following the switch.
For all the preparation, the European Fund and Asset Management Association estimates as much as $70 billion of its members’ daily currency trades may miss the CLS deadline for next-day settlement. Firms without a US presence can use workarounds including purchasing dollars in advance or outsourcing their currency trades, but all approaches come with their own additional costs and challenges.
The firm says that represents “significant progress” as T+1 implementation approaches. But with only weeks to go it’s short of the DTCC’s own target for a 90 percent same-day affirmation rate. In the new system, a US investor selling an ETF should get cash for their shares within one day, but the proceeds from the sale of a fund’s underlying international stocks will likely take at least two days to arrive. And when most overseas investors buy a fund containing US stocks, the new underlying assets should be paid for in one day, even though the payment for the ETF shares may take two or more.
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