One regulatory tweak in the US is about shake up global trading
A US shift to shorter trading settlement cycles might sound technical – but it’s about to shake-up global markets. Some say the consequences in the UK and beyond could be profound.
As a group of self-described trading “anoraks” chatted on a videocast late last week, the sense of annoyance from some was palpable.
“The arrogance of the Americans to inflict this on the rest of the world,” said one speaker. “Nevertheless they are who they are, and we have to shape our own procedures to implement that.”
The comments came in reference to a tectonic shift about to ripple through the back offices of global trading floors. In May, the US will move to a one-day settlement system for trades, known as T+1, meaning that all information will need to be checked and cash handed over within one working day of a trade being made.
For those outside the bowels of the global markets, a two day timeline to buy a security may seem an anachronism. As a landmark report into the UK’s own settlement system noted on Friday, consumers can “buy and receive an airline or train ticket on their phone within a matter of minutes” yet it takes two days to settle a trade in securities.
Arrogance or not, the US’s plans – confirmed in February last year – are in step with a host of other major nations. Canada and Mexico are moving to a T+1 settlement period alongside the US next month, India is already operating on T+1 and consulting on a move to instant same-day settlements, or T+0, which China already operates on.
The UK and the EU, however, currently work to a two-day timeframe, with both jurisdictions currently weighing up a move to follow the US.
North America’s changes are ostensibly about boosting efficiency, but corners of the market are already readying themselves for a series of technical challenges.
Asian markets, and those in time zones further away from the US, may be hamstrung by the one-day turnaround in the US. FX trading will also face particular speed bumps and firms may need to stump up cash in so-called pre-funding costs, according to trade body the ISITC.
Exchange traded funds listed in the UK will also face the challenge of their US listed holdings suddenly being subject to one-day settlement time frames. T+1 will also have a knock-on effect on stock lending and borrowing, with less time to identify and recall loans.
But the move has also triggered deeper concerns, and nervous back-room staff are warning of potentially unforeseen and far reaching consequences.
“People sell T+1 as more efficient, but it also puts strains on systems and there’s less margin for error,” Richard Metcalfe, global head of regulatory affairs at the World Federation of Exchanges, the global trade association for exchanges, tells City A.M.
“There’s time [with T+2] to sort out problematic trades where, maybe there’s been some sort of miscommunication.
“Unless you’ve got all your processes sorted across the industry, across the whole chain of participants, moving to T+1 may force people to get up to speed – and there’s some risk of things fraying at the edges.”
“We do not know what the resilience of the market is to cope with this.”
Some warnings have been markedly more dramatic. Gary Wright, director of the International Securities Association for Institutional Trade Communication, likens the sudden cliff edge in May as that of the fabled ‘Y2K bug’ at the turn of the millennium, which some warned would trigger a meltdown in the world’s computer systems. The sudden roll-out could also “be extremely attractive to cyber terrorists”, who will take advantage of the turmoil, he warned last week.
“There’s been no industry wide cost-benefit analysis. The decision has been made by governments, regulators and agencies, but they’ve made the decision before they understand what the risks are,” he tells City A.M.
“We do not know what the resilience of the market is to cope with this.”
One of his colleagues, Tony Freeman, says the US has pushed ahead with “breakneck” speed without thinking about the world outside the US, where 40 per cent of its trading activity is derived.
“It’s a bit of an experiment,” he told the videocast, hosted by the Chartered Institute for Securities & Investment.
While the intricacies of the UK trading cycles have lacked the sexiness of some regulatory reforms outlined in the UK, efforts to accelerate them have formed a pillar of the government’s move to revamp the UK’s capital markets.
As part of the Edinburgh Reforms package in December 2022, Chancellor Jeremy Hunt appointed a taskforce to lead a review into settlements, which laid out a timelines for a shift to one-day settlement last week. Firms have been told to prepare for T+1 by the end of 2027, more than three years after the US.
Many have been quick to criticise the sluggishness of UK regulators in rolling out reform, but the steadier approach to settlement times is now being regarded as a safer move.
“It’s important that the UK does it well,” Charlie Geffen, a senior partner at Flint Global who was appointed by Hunt to lead the review, tells City A.M. “We’ve got clear consensus that it has to happen. And we’ve been pretty pragmatic about setting up a clear timeline.”
The shift to speed is regarded in the market as inevitable, he says, but we should be thankful we’re not playing the guinea pig.
“The US is moving to T+1 in May and there is a benefit to the UK in being able to learn the lessons,” says Geffen. “We will be able to learn a lesson from that which will improve the chances of the UK doing well and smoothly.”
There may be technical hitches as the US transitions at the end of May. But as Wright and others warn, the real risks may still be unknown.