Quiver Quantitative - The impending shift in US equity trade settlement from a two-day (T+2) to a one-day (T+1) cycle has spurred concerns across the $7.5 trillion-a-day global foreign exchange market. This alteration will require overseas institutions investing in US assets to secure dollars in advance, ensuring timely settlements. This adjustment may cause operational complications in the established trading routines. Notably, foreign-exchange desks might have to extend their work hours, particularly in New York, and we could witness increased trading volumes during Asia’s unpredictable morning sessions.
In response, several financial entities are reshuffling their operations. Baillie Gifford, for instance, is relocating employees to the US to address the potential challenges. According to the Depository Trust and Clearing Corporation, a significant portion of European firms plans to either move their staff to North America or employ overnight staff in Europe or Asia. The primary driver behind the SEC's decision to expedite the settlement time is to reduce the risk of transaction defaults, as seen during the "meme stock" frenzy in January 2021, which pressured platforms like Robinhood (NASDAQ:HOOD) to limit trading.
The compressed settlement time is especially problematic for the foreign-exchange market because of its distinct trading day structure. European investors will find it challenging as they would only have a two-hour window for settlements post the US market close, a drastic reduction from the current 12-hour window. This could necessitate a rapid transaction on the following trade day, possibly instigating significant activity during Asia's "witching hours" – a period known for its low liquidity and occasionally significant market moves.
Many industry experts believe this move towards T+1 in equity trade settlements is a signal for the foreign exchange market to accelerate its processes. Technological innovations like distributed-ledger technology could provide solutions without having to physically relocate employees. However, this advancement in equity settlement has been deemed a significant post-trade issue, and with only eight months until its implementation, it's ascending the foreign exchange industry's priority list.
This article was originally published on Quiver Quantitative