The Challenge of Transitioning to Faster Trade Settlements

The Challenge of Transitioning to Faster Trade Settlements

The recent transition to faster trade settlements for securities in the U.S. has been met with processing bumps, according to market participants. The move from a two-day settlement cycle (T+2) to a one-day settlement cycle (T+1) was adopted to comply with a rule change by the U.S. Securities and Exchange Commission. This shift in the world's largest financial market aims to make market infrastructure more resilient, but it has raised concerns about trade failures and other hiccups.

While some challenges have been encountered, market associations like the Securities and Financial Markets Association (Sifma) and the Investment Company Institute remain optimistic about the progress of the transition. William Coleman, head of U.S. ETF Capital Markets at Vanguard, noted that the first day of trading under T+1 settlement went smoothly, despite the anticipated adjustments for firms.

Importance of Trade Affirmations

One key aspect of trade settlements is the rate of total trades affirmed by participants. The higher the affirmation rate, the more likely trades are to be settled successfully. Data from the Depository Trust and Clearing Corporation shows an increase in the rate of total trades affirmed with the implementation of T+1, indicating a positive trend towards successful settlements.

Despite the overall progress, some challenges have been identified in processing and preparing trades for settlement. Delays overnight have been reported, particularly at the National Securities Clearing Corporation, a subsidiary of DTCC. However, these issues have been addressed in a timely , ensuring that orders are caught up with and settlements can proceed as planned.

Anticipating Trade Failures

As the industry continues to adjust to the faster settlement cycle, market participants are bracing for more trade failures. Research firm ValueExchange suggests that the fail rate could increase to 4.1% after T+1 implementation, up from 2.9%. Despite these challenges, the industry remains focused on adapting to the new settlement regime and ensuring that trade settlements are completed successfully.

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Lessons from Canada and Mexico

In Canada and Mexico, the implementation of T+1 changes has been successful, with some isolated delays that were promptly addressed. The move towards faster settlement mechanisms has been welcomed by industry experts, highlighting the importance of keeping pace with the demands of a rapidly evolving financial landscape.

The transition to faster trade settlements presents both and challenges for market participants. While there have been processing bumps and delays along the way, the overall outlook remains positive. By addressing issues promptly and working towards increased efficiency, the industry can navigate the transition towards faster settlements successfully.

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