Asset managers prep for more failed trades from faster transactions

Global investment houses are bracing for more failed trades as a result of plans to halve the time it takes to settle American stock transactions to just one day. 

Around 60% of asset managers fear a higher rate of settlement failures will be the consequence of regulations coming into force in May that will speed up the time it takes to complete a U.S. security trade. That’s according to SIX Group’s Future of Finance report, which polled 343 C-suite executives at financial institutions from around the world. 

The looming shift will put stocks in the largest equity market out of step with not only global peers but also the world of foreign exchange, where trades typically take two days to complete. That threatens to create new risks for firms unprepared for the transition. 

“The move is going to impact European market participants that trade in US securities, especially as the risks associated with moving to T+1 include penalties if settlement fails,” said Nicholas Phillips, a market structure researcher at Bloomberg Intelligence. “If you sell a stock in the UK at the same time as buying a stock in the US, the different settlement cycles create a funding and currency risk.” 

Major financial institutions including banks, brokers and investment houses now have less than seven months to prepare for America’s switch to what’s known as T+1, after it transitioned to T+2 back in 2017. It’s set to be a headache in particular for overseas investors without a global staffing presence, as timezone differences exacerbate the rush to complete trades on schedule. 

“Asset managers are clearly concerned about the potential for errors in a more compressed timeframe,” said Steve Carlin, a vice president at post-trade processing firm AutoRek. “The reality of a shorter settlement cycle for US stocks and bonds means a much quicker turnaround for tasks such as the reconciling of trade details between different firms.”

More than half of European financial companies with fewer than 10,000 staff are planning to either move people to North America or hire overnight staff, an earlier survey sponsored by the Depository Trust and Clearing Corporation revealed. Edinburgh-based Baillie Gifford is among those relocating traders to New York so they’re better-placed to execute transactions at the end of the US session. 

SIX’s findings chime with a separate Bloomberg Intelligence poll of European buyside traders, which found 59% aren’t in favor of a faster settlement cycle. 

“Perhaps the most prominent discussion in financial regulation right now revolves around the implications of the shortening of the securities settlement cycle to T+1 for US securities,” Jesús Benito, head of domestic custody and trade repositories operations at SIX, said in the report. “There will be different settlement cycles between North America and Europe over the near to medium term, which may explain why many respondents anticipate greater operational complexity.”