The Evolution of Equity Trade Settlement: The Move to T+1 Cycle
When it comes to the clearing and settlement of equity trades, it may not be the most thrilling topic, but it certainly holds significance in the financial world. This year marks a significant change in the US equity market as it transitions to a shorter settlement cycle.
Starting May 28, trades in US stocks will settle the day after the trade date (T+1), down from the current T+2 cycle. This shift will bring US markets in line with a faster settlement model compared to other developed markets operating on T+2 or T+3 cycles.
This move to a faster settlement cycle provides several benefits, including reducing systemic risks, operational risks, and liquidity needs. It also streamlines the process for market participants, allowing quicker access to proceeds from trades and minimizing margin requirements.
Considering the advancements in technology, the push for even faster settlement cycles raises questions about the possibility of real-time cash transfers alongside instantaneous money transfers. However, different settlement procedures for money and securities create operational challenges, especially across national markets.
Why Does This Matter to a Global Index Provider?
As a global index provider, FTSE Russell’s role extends beyond tracking market indices. The shift to a T+1 settlement cycle in US equities introduces complexities for non-domestic investors, which may impact foreign exchange transactions and operational procedures.
Knock-on Effects
The move to a shorter settlement cycle in the US equity market could have ripple effects on global financial market participants, especially impacting index fund managers. With US shares representing a significant portion of global equity indices, the shift to T+1 settlement raises operational challenges.
Keeping an Eye on Equity Market Structure
Market structures are constantly evolving, and FTSE Russell closely monitors these changes through its equity country classification process. The shortening of settlement times is a notable trend, and FTSE Russell will keep a close watch on the impact of the US equity settlement cycle contraction.
For more insights on this topic, explore resources on the market and index impact of the shorter US equity settlement cycle and the challenges and opportunities for FX resulting from the shift to T+1 in the US and Canada.
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*Please note that all opinions expressed in this post are solely of the author and should not be considered investment advice. The views expressed do not necessarily reflect those of CFA Institute or the author’s employer.
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