The world of equity trade settlement is undergoing a significant change this year as the US market transitions to a shorter settlement cycle. This shift, set to take place on May 28, will see trades in US stocks, corporate bonds, and unit investment trusts settle the day after the trade date (T+1) instead of the current two-day settlement cycle (T+2). Furthermore, the national equity markets of Canada and Mexico will also adopt this shorter settlement cycle, placing the US equity market ahead of most other developed markets operating on a T+2 or T+3 cycle.
- Benefits of Faster Settlement
- Reduces systemic risks
- Decreases operational risks and liquidity needs
- Mitigates counterparty risks
- Lowers margin requirements
- Provides investors quicker access to sale proceeds
The move towards faster settlement aligns with technological advancements and raises questions about the potential for real-time cash movement alongside instantaneous money transfers through faster payment systems. However, the current disparities between the settlement processes for money and securities, combined with the existence of national currencies and securities markets, hinder seamless movement between both spheres.
The Significance for a Global Index Provider
As a global index provider like FTSE Russell, understanding market behaviors and operational nuances across different markets is crucial. Settlement cycles have greater implications beyond local traders and investors, especially for non-domestic investors in US shares who will now face complexities due to the misalignment between the new T+1 settlement cycle for US equities and the T+2 convention in the FX market.
Knock-on Effects
This shift in the US equity settlement cycle could have ripple effects on worldwide financial market participants, particularly index fund managers, whose ability to replicate regional or global benchmarks might be challenged by the new settlement cut-off times. With US shares constituting over 60% of global equity indices by weight, this adjustment could impact the replicability of these benchmarks.
Monitoring Market Changes
FTSE Russell actively monitors changes in equity market structures through its equity country classification process, which considers regulation quality, dealing landscapes, and custody and settlement procedures. Despite the positive trend towards more seamless post-trade procedures and shorter settlement cycles in recent years, the impending contraction of the US equity settlement cycle presents a new area of concern that FTSE Russell will closely observe.
In conclusion, the shift to a shorter settlement cycle in the US equity market signifies a significant change with far-reaching implications for global financial markets. By staying attuned to these changes and adapting accordingly, market participants can navigate the evolving landscape of equity trading effectively. Don’t forget to subscribe to the Enterprising Investor for more insights and updates.
