This year’s seemingly smooth transition to a faster settlement regime for US stocks turns out to have been far from plain sailing for many industry players, according to Citigroup Inc.
From overhauling arcane funding processes to relocating traders across oceans, the late-May switch to the system known as T+1 proved tougher than expected, the bank found in a survey of market participants.
The scale of the changes required — which affected multiple divisions including funding, FX and securities lending — caught out many in the industry, the poll shows. Meanwhile the impacts of the switch appear to have been felt unevenly, with the likes of asset managers hit with higher funding costs as banks and other intermediaries see expenses drop.
“Every area appears to have been more impacted than originally anticipated, from funding to headcounts, securities lending and fail rates,” the Wall Street bank’s securities services arm said in a report released Wednesday. “Investment budgets have been diverted, non-critical projects delayed and essential resources borrowed.”
The T+1 shift was a global event for the financial industry because it affected every institution and investor with cash in the US capital markets. The change introduced a slew of challenges, including significantly reducing the available time to complete important steps of the trade process.
Extensive preparations helped ensure an apparently smooth transition, but the Citi survey indicates the work isn’t done yet. The bank found 33 per cent of projects related to the T+1 shift — mainly in the form of further automation as well as additional hiring — are still to be undertaken, and are likely to happen in 2025.
Just over half of banks and brokers say T+1 has significantly impacted headcounts at their firms. That’s as new workflows leave them “exposed to large volumes of manual processing and exception handling triggered by their clients,” the report said.
Many are relocating staff to better align their working days with key trade processes, with some 38 per cent of respondents saying they are moving staff as a result of the switch, usually on their FX and funding teams.
The survey, which polled about 500 market participants, notes a big discrepancy when it comes to the impact of T+1 on funding costs.
The single biggest impact for brokers and custodians has been a roughly 30 per cent reduction in clearing margin, with some 80 per cent of the sellside calling the development strongly impactful to their business.
In contrast, 46 per cent of buyside respondents say they’re having to cover significant funding gaps during the settlement process as they navigate between T+1 and T+2 regimes (the latter is still standard in Europe and in the global currency market).
Given the ongoing mismatches across global markets, focus is now turning to the likelihood that other jurisdictions — including the European Union, the UK and Australia — will ultimately also accelerate their settlement cycles.
(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)
First Published: Sep 04 2024 | 11:34 PM IST
