Shorter settlement times coming for US and Canadian trading

Next week’s shift by US and Canadian markets to a shorter settlement cycle will make it easier for fund managers to manage liquidity, says Public Trust GM of corporate trustee services David Callanan.

Wednesday, May 22nd 2024, 6:43AM

by Andrea Malcolm

US markets will shift the settlement cycle for trades of securities from T+2 (trade plus two days) to T+1 days on May 28th. Canada will follow suit the next day to align with its neighbour. Time frames for affirmation and matching of US securities trades will also change to 9pm EST on trade date.

A trade involves four steps; initiation of the trade, confirmation or affirmation between the two parties, settlement where the value is exchanged, and reconciliation. Moving to T+1 settlement will shorten the timeframe between steps one and three.

Callanan says the ability of fund managers to deploy capital more efficiently and better manage liquidity will be material.

“If you’re waiting two days for a trade to settle, you’ve got cash or assets just sitting there that you can’t manage as you normally would.”

He says in the US and Canada, the settlement process takes place at a clearing house that facilitates the exchange of value. It is estimated that following the transition to T+1 settlement, the volatility for the clearing house margin will reduce by 41%.

Callanan describes the settlement process as the plumbing of the financial markets and the change pushes participants to reengineer processes and be more efficient to turn trades around in a shorter period of time.

The issue facing the local investment industry is the challenge of working against the global clock to meet the 9pm EST cut-off in the US, especially before weekends and public holidays.

As a custodian, the Public Trust has upgraded its internal processes, automating them for ‘straight through processing’ (STP). It has worked in collaboration with sub-custodian BNP Paribas.

The New Zealand investment industry also needs to consider the potential of other markets following suit. Callanan says New Zealand in collaboration with Australia, the UK and European markets are all expected to move to T+1 eventually.

Ultimately, in the future, shortening the settlement cycle may go further than T+1, says Callanan. “Whether through tech such as blockchain or other enhancements, we should get to a point where if everyone has agreed to a trade, we should get near to realtime.”

Kernel’s Dean Anderson says Kernel has already moved to T+1 settlement, and investors will see no change. Sharesie’s Leighton Smith says customers should see their money after settlement available for withdrawal a day later rather than two.

Tags: Public Trust