Friday, May 24, 2024

Settlement: "Speedier Wall Street Trades Are Putting Global Finance On Edge"

From BNN Bloomberg, May 19:

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.

A spike in the number of failed trades, operational glitches and additional costs are among industry fears as the trading process for American securities accelerates, with the time allowed to complete every transaction halved to a single day.

Spurred on by the original meme-stock frenzy, the Securities and Exchange Commission is pushing the shift to reduce the chance of something going wrong between when a trade is executed and when it’s settled. But the switch to what’s known as T+1 comes with risks of its own.

International investors — who hold about $27 trillion in American markets — face a system in which the usual method of funding a US trade takes longer than they actually have to execute the deal. Unheralded parts of the trading process like affirmation (confirming details), fixing errors, and recalling securities out on loan must happen at least twice as fast. Global funds face a mismatch where cash flowing in and out moves at a different speed to the assets they have to buy and sell.

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.

“All hands will be on deck,” said Michele Pitts, Citigroup Inc.’s global head of custody data for securities services, noting the likelihood of increased trade fails across the industry. “There will be a significant uptick in settlement risks for the first several weeks.”

About the ‘T+1’ Rule Making US Stocks Settle in a Day: QuickTake

‘Lot of Anxiety’

Under current rules, anyone purchasing a US stock has two days between hitting the “buy” button and actually having to deliver money for the trade, while the seller has the same time to supply the share. This lengthy settlement period in such a large and sophisticated market is what remains from the days when transactions were manual and investors had up to a week to complete them.

That’s been whittled away over the years, and new SEC rules will slash the settlement time again on May 28 to one day. Across Wall Street and beyond, major banks, asset managers and an assortment of specialized service firms are bracing for the fallout.

At JPMorgan Chase & Co., internal modeling shows about a quarter of the currency trades it processes for clients are set to be impacted. Brown Brothers Harriman & Co. is putting clients through a “T+1 simulator” to identify those with potential issues....