On Tuesday, U.S. trading of equities, corporate and municipal bonds and other securities moved to a one-day settlement cycle (T+1) from two days (T+2), to comply with a rule change adopted in February by the U.S. Securities and Exchange Commission.
Canada, Mexico, Argentina and Jamaica implemented T+1 on Monday.
The shift in the world’s largest financial market is aimed at making market infrastructure more resilient, but investors and regulators braced for increased trade failures and other hiccups.
The Securities Industry and Financial Markets Association (Sifma) said it was optimistic about the progress of the transition. “All T+1 implementation activities have been completed and appear to be operating normally,” the Investment Company Institute said in a statement. “The first day of trading under T+1 settlement went smoothly,” said William Coleman, head of U.S. ETF Capital Markets at Vanguard. “While there may be some increased risk of failed trades as firms continue to adjust to the new settlement regime, we expect most trades will settle successfully today.” An early indication came from data on trade affirmations, in which participants verify and agree on the trade details. The Depository Trust and Clearing Corporation said that as of Tuesday evening the rate of total trades affirmed was 92.76%, higher than Friday’s 89.59%. The higher the affirmation rate, the more likely trades are to be successfully settled.
Settlement is the process of transferring securities or funds from one party to another after a trade agreement. It follows clearing and is handled by the Depository Trust Company, a subsidiary of DTCC.
In Mexico, an executive from the main stock exchange BMV said the move would help boost transaction volumes.
“The fact that the trade settlement period has been shortened by one day reduces the exposure of portfolios and generates collateral resources that brokerage firms can use,” BMV executive Jiyouji Ueda said.
Stephane Ritz, a managing principal at consultancy Capco, cited delays overnight in processing and preparing some trades for settlement at the National Securities Clearing Corporation, a DTCC subsidiary. The issue has been addressed in a “very timely fashion” and orders have been caught up with, Ritz added.
The delays caused a lot of apprehension, said John Oleon, managing director at prime broker Clear Street. “Now that we’ve had that issue last night people are going to be sitting on the edge of their seat.”
DTCC cited some processing delays overnight which have been resolved. “We are processing transactions normally,” a spokesperson said in a statement.
Wednesday was the first big test for Wall Street as trades executed Friday, when T+2 was still in place, and trades from Tuesday, the first day of T+1, were being settled, which was expected to lead to a rise in volume.
Market participants expect more trade failures as the industry adjusts to the faster cycle. Research firm ValueExchange said on average market participants expect the fail rate to increase to 4.1% after T+1 implementation, from 2.9%.
In Canada, T+1 changes were implemented successfully and are functioning as expected, despite some isolated delays, which were addressed, a spokesperson for TMX, owner of the Canadian Depository for Securities, said in an email.
“In an era where everything is marked by immediacy, it no longer made much sense to continue with settlement mechanisms from the last century,” said Alejandro Felix from Mexico’s main association of stock exchange entities.
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