Sleepless nights as US cuts trade settlement time

FILE PHOTO: Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., May 17, 2024. REUTERS/Brendan McDermid/File Photo

SINGAPORE: The move by the US securities market to slash the time to settle trades will mean sleepless nights and an even more hectic work pace for brokerages and dealing rooms in Singapore and the Asia-Pacific.

The vastly different time zones between New York and Asia will ratchet up the pressure on brokers here when the US market, the world’s largest, requires trades to be settled in one business day instead of two from May 28.

The shorter processing time aims to cut risks and improve liquidity but it poses challenges for operations in the region dealing securities on the New York Stock Exchange and tech-heavy Nasdaq, which together clocked up trades of US$54 trillion in March alone.

Brokers told The Straits Times that they would need to deal with a compressed timeframe and manage foreign exchange risks.

Financial centres in the region, including Singapore, are at least 12 hours ahead of New York, while Australia and New Zealand are 16 to 18 hours ahead.

“What is meant to be a one-day settlement period will be reduced to just a few hours for Asian firms, piling the pressure on operations teams,” said Javier Hernani, head of securities services at SIX, a European post-trade service provider for clients in more than 50 markets.

He said market participants in the Asia-Pacific will have to confirm their securities and foreign exchange trades almost instantaneously, and the exchange of cash and securities has to take place shortly after the trade to meet the tighter settlement timeframe.

“Settlement” in the market context refers to the transfer of securities to the buyer’s account and the cash to the seller’s account.

The settlement cycle for most US securities deals has been two business days, or T+2, since 2017.

This changes on May 28 when deals will have to be settled one business day after the trade execution (T+1).

“If you sell shares of ABC Ltd on Monday, the transaction must be settled on Tuesday. If you have a securities certificate, you will have to deliver it to your broker-dealer earlier.

“If you hold your securities with your broker-dealer, it will deliver the securities on your behalf one day earlier.

“Similarly, if you are buying securities subject to the T+1 settlement, you need to pay up one business day earlier.

“If you have a margin account, the T+1 settlement cycle may impact certain provisions of your agreement,” he said.

The shorter settlement period means less time for market participants to address errors in the transaction process and for regulators to block the potential proceeds from fraud, among other challenges.

The situation can get trickier for those who need US dollars in place to fund deals as foreign exchange transactions typically take longer to settle.

Scott Gold, head of North American sales at BidFX, an institutional foreign exchange (forex) trading platform provider owned by the Singapore Exchange, said Asia-based fund managers must first ensure they get hold of the right amount of US dollars to settle their trade orders.

“With settlement timeframes halved and the time zone constraint leaving eastern fund managers little time to manoeuvre, seamless access to forex rates will be essential to ensuring timely conversion to dollars and ultimately permitting equities trades to settle before the deadline,” he added.

Small and medium funds will be most vulnerable, with many lacking the resources to conduct thorough pre-trade cheques. If these firms make a habit of shying away from US securities trades out of fear of settlement failure, liquidity could suffer, he noted.

Hernani said there is a need for market participants across Asia-Pacific to take prompt action by collaborating with custodians and multi-market support providers to insulate firms from the risk of settlement failures.

“For those that act quickly, it could pose a unique opportunity to gain an edge over the competition and give themselves a head start as the likelihood of a shorter settlement cycle in their own markets becomes unavoidable,” he added.

An OCBC Securities spokesperson said: “We have enhanced our processes to handle the upcoming changes in the settlement cycle. We will continuously monitor the situation to ensure a smooth transition for all our clients.”

China’s onshore market is already functioning on an instant settlement or T+0 cycle.

India is on a T+1 cycle, and has started offering an optional instant settlement in 2024.

Singapore follows a T+2 settlement cycle.

The Straits Times understands that there is no plan to follow the United States and shift to T+1 as this will require a harmonisation of settlement times across the ecosystem of financial players. — The Straits Times/ANN

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Trade , settlement , liquidity , securities


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