Wall Street ushers in new era of faster trade settlement
USA-STOCKS/SETTLEMENT (UPDATE 4, PIX):UPDATE 4-Wall Street ushers in new era of faster trade settlement
Investors in U.S. equities, corporate and municipal bonds and other securities now must settle their transactions one business day after the trade, instead of two, to comply with a rule change adopted last February by the U.S. Securities and Exchange Commission.
Regulators hope faster settlement will reduce risk and improve efficiency. They sought the new standard, commonly called T 1, after the 2021 trading frenzy around the “meme stock” GameStop highlighted the need to reduce counterparty risk and improve capital efficiency and liquidity in securities transactions.
“Shortening the settlement cycle … will help the markets because time is money and time is risk,” said SEC chair Gary Gensler in a statement.
However, it comes with risk since firms have less time to line up dollars to buy stocks, recall shares out on loan, or fix transaction errors, which could heighten the risk of settlement failures and raise transaction costs.
A big test for the market occurs on Wednesday, when trades executed last Friday, when T 2 was still in place, and on Tuesday, the first day of T 1, will be settled. This is expected to lead to a rise in volume.
“Tomorrow and the next day are the big days,” said John Oleon, managing director at prime brokerage Clear Street. “It comes down to customer allocations and affirmations and that won’t really wash itself out for the next few days.”
Settlement is the process of transferring securities or funds from one party to another after a trade has been agreed. It takes place after clearing and is handled by the Depository Trust Company, a subsidiary of the Depository Trust and Clearing Corporation.
Trades fail when a buyer or seller do not meet their trading obligation by the settlement date, which could result in losses, penalty fees and hurt reputations.
The U.S. will be following India and China, where faster settlement is already in place. Canada, Mexico, Argentina and Jamaica implemented it on Monday.
“Hopefully, we’ll start to see the benefit that we expect to see which is the reduction in risk, a reduction in margin or collateral, and we’re hoping that this happens without serious impact to settlement rates,” said RJ Rondini, director of securities operations at the Investment Company Institute.
