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The shorter settlement cycle of U.S. securities raises global concerns

Shortened settlement cycle prompts reassessment of credit risk exposures (Via Ben Barnes/Shutterstock)

The upcoming change to a shorter settlement cycle for U.S. securities poses a major challenge for international fund managers. Moving from T+2 to T+1 starting May 28 creates operational difficulties and higher risks, prompting market participants to rethink their approaches.

Triggered by the volatility after the GameStop incident in 2021, the shift aims to reduce unsettled trades. Concerns include staffing, increased cash requirements, and heightened foreign exchange risks. Fund managers expect to need more cash to cover potential gaps, which could impact fund performance negatively.

While the change promises operational benefits like lower risk and better efficiency, it also brings challenges. The Depository Trust & Clearing Corporation, with support from groups like the Investment Company Institute, is actively preparing for the transition.

International fund managers grapple with cash issues (Via Kane Allen/Shutterstock)

Market players must speed up their readiness to adapt effectively. Operational hurdles, such as potential disruptions in foreign exchange transactions and greater demand for short-term funding, are significant concerns.

There are worries about equity market liquidity and credit risk implications. The shorter settlement cycle might reduce the time to recall securities lent to short sellers, affecting market liquidity.

Fund managers are exploring different strategies, including splitting settlement cycles and evaluating credit risk exposure. Despite these challenges, the industry is vigilant, aiming for a smooth transition while ensuring operational strength and market stability. This shift diverges from the T+2 norm followed by much of the world, requiring adjustments in global market practices.

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