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Written by Laura Matthews and Sinead Crews
NEW YORK/LONDON (Reuters) – The impending introduction of shorter settlement cycles for U.S. securities is preparing international fund managers to deal with staffing issues, the prospect of holding more cash and the risk of currency risk. It is facing a growing problem and is causing a lot of headaches.
Due to upcoming changes introduced to reduce the risk of unsettled trades after a floating period, securities trades will be settled one business day after the trade, i.e. T+1, instead of two business days.
The move follows GameStop’s 2021 sell-off and is scheduled to take place on May 28 in the US.
However, the country is at odds with many other countries in the world whose typical cycle is T+2. As a result, market participants are rethinking their processes to avoid failed trades and increased transaction costs, according to custodians, traders and consultants.
“(The transition) comes with costs,” said Ben Springett, head of European electronic and programmatic trading at Jefferies.
“It would be expected that there would be a need to increase the fund’s cash balance to close any potential gaps or cash discrepancies,” Springett said. “So that would have a negative impact on the fund’s performance.”
The Depository Trust & Clearing Corporation (DTCC), which provides securities clearing and settlement in the U.S. financial markets, has been working with industry groups, including the Investment Company Institute (ICI), to prepare.
Tom Price, managing director and head of technology, operations and business continuity at the Securities Industry and Financial Markets Association, said that while T+1 is a “complex and complex undertaking”, it is a “high risk mitigation and business continuity initiative” for the industry. He said it has the following advantages.
RJ Rondini, director of securities operations at ICI, said that for the U.S. securities market, “the overall decline in capital far exceeds the actual absolute increase in risk in all other areas.” Ta.
DTCC declined to comment. A paper published on February 28 says market participants need to accelerate their preparations.
trading hours
Shorter cycles can create operational challenges, including potential disruption to FX trading. Foreign investors need to buy dollars to fund U.S. securities transactions.
Nathan Burgest, trading director at Record Financial Group, said he was considering whether more trades late in the day would increase exchange costs if liquidity moved away from London morning.
The European Fund and Asset Management Association (EFAMA) said earlier this month that early settlement in the US posed a “systemic risk” to Europe, adding that the window through which market participants outside the US could access CLS, the world’s largest multi-financial institution, He pointed out that it was very limited. Currency payment system for FX trading.
According to EFAMA, asset managers that trade up to the US close have just two hours to confirm and submit these trades to CLS. EFAMA members estimate that between $50 billion and $70 billion of foreign exchange transactions will have to be settled every day outside the safety of CLS, leading to calls for an extension of the CLS cut-off time. The survey results were as follows.
Jefferies’ Springett said some participants outside the U.S. are considering contingencies such as setting up outposts in the U.S. and U.S. working hours.
A shorter cycle could have other knock-on effects, such as increased demand for short-term funding. While some investors typically have to wait until they receive cash from one market before purchasing securities in another market, investors who sell international securities to buy into the United States have no cash available in a day. There may be a shortage.
While this could increase the use of overnight repurchase contracts, BNY Mellon’s custodian said Adam Watson, head of services and commercial products. .
“This will cause portfolio managers to start thinking, ‘Should I go to the overnight repo market or…can my custodian extend credit overnight?'” Watson said. .
Custodians, the custodians of customer assets, typically provide short-term credit to their customers in the form of intraday liquidity and exceptionally overnight funding to support settlements across different systems and time zones. To do.
But these types of loans are typically limited to processing customer securities or payment transactions and are not generally committed, so they are not guaranteed credit extensions, Watson said.
ripple effect
Other results are possible. Global index funds such as exchange-traded funds (ETFs), which include many assets with mismatched settlements, could also face disruption, managers said.
Steve Fenty, head of currency management at State Street Global Markets, said that when there is a dissonance between a fund’s settlement cycle and its underlying assets, managers can choose between a fund with a higher proportion of U.S. assets and a more diversified fund. He said he may consider splitting the payment cycle between the two. Global Fund.
Josh Galper, managing principal at capital markets consulting firm Finadium, said the changes could reduce the time it takes to recover securities lent to short sellers in the U.S. He said stock market liquidity could also decline.
“It’s often overlooked how much impact short liquidity selling and securities lending has on the stock market,” Galper said. “It’s the type of thing you know when it’s gone.”
(Reporting by Laura Matthews in New York and Sinead Cruz in London; Additional reporting by Davide Barbusia in New York; Editing by Megan Davis and Daniel Wallis)
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