Securities settlement

T+1 is a great challenge for the fund industry

Interview with Thomas Richter, CEO of the German Investment Funds Association BVI

From 28 May 2024, the settlement period for trading in US securities will be shortened by one day, from T+2 to T+1. Canada and Mexico will move to T+1 on 27 May 2024. If fund companies have not prepared, there is a risk that it will not be possible to settle US securities transactions or it will not be possible to settle them on time. This could lead to restrictions and possibly penalties, and therefore additional costs, for the funds.

What do T+2 and T+1 actually mean? And what is the US securities regulator aiming to achieve with this change?

T+1 and T+2 describe how many days after trading a security must be in the buyer's portfolio or the sale proceeds in the seller's account. The USA is now shortening this period from two days to one. The aim is to enhance the efficiency of securities settlement, reduce settlement risk and increase liquidity in the financial system.

The change refers only to US securities. To what extent are German fund companies affected?

German open-ended retail funds and Spezialfonds hold on average 15 per cent of their assets in US securities; in equity funds, the proportion is even higher than 30 per cent. This means that all fund companies are affected. They will have to change their business processes to avoid restrictions and possible penalties when trading US securities after 28 May.

How challenging is the change for the fund companies?

It is highly complex because it affects the entire value chain, from portfolio management to trading, the middle and back offices and cooperation with custodians. In future, US securities transactions will have to be confirmed at the end of the trading day and transferred to settlement. Trading, middle and back office will therefore have only a few hours to do this. Foreign exchange liquidity management is a particular challenge, as transactions are settled in US dollars. Buyers of US securities will have to provide the cash for settlement one day earlier than before. Depending on the time zone, this could mean that the foreign exchange market will have to turn into a pre-financing market. The change will also have an impact on the securities lending business: Borrowers will have to ensure that acceptable collateral is available in time, and lenders will have to efficiently manage the receiving and returning of collateral within the shortened settlement time.

What specifically do fund companies need to ensure that all processes can be completed within the shortened period?

When adapting business operations, processes and settlement channels should be further automated to enable transactions around the clock.

That will be expensive for European market participants. Should Europe also switch to T+1?

Yes, absolutely. EU Commissioner Mairead McGuinness announced in January 2024 that the EU will also move to T+1. Last year, ESMA published a consultation on the switch to T+1, or even T+0, in which we participated. We support the switch to a one-day settlement period. However, we are calling for an appropriate period for implementation, including a testing phase so that all market participants can carefully adapt their systems. It is important that all asset classes are converted at the same time.

You mentioned that ESMA has also consulted on moving to T+0, which means settlement on the same trading day. What is your position on this?

We reject moving to T+0. Fund companies need to settle securities in a complex and fragmented settlement landscape in the EU with numerous market participants. A switch to T+0 would require, among other things, a fundamental reorganisation of pre- and post-trade processes.

The questions were asked by Christiane Lang, Internet Editorial Team.

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