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Anticipated changes as the United States accelerates stock settlement

Market Volatility Persists: Dow and S&P Post Third Consecutive
Market Volatility Persists: Dow and S&P Post Third Consecutive

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New Securities and Exchange Commission rules in February 2023 will half the settlement period for U.S. equities, corporate, municipal bonds, and other securities to one day, or T+1, on Tuesday, upsetting U.S. markets.
What to expect:
What’s settlement?
When the buyer receives security and the seller is paid, a trade settlement occurs. The DTC, a subsidiary of the Depository Trust and Clearing Corporation, finishes this process.
How does speeding up settlement affect markets?
Regulators anticipate that the acceleration of settlements will lead to a reduction in risk and an improvement in efficiency in the world’s largest markets. This is because faster settlements provide investors with their money and assets sooner, eliminating the need for them to wait for their funds or securities for two days, as is the current practice.
How will it be implemented?
Banks, custodians, asset managers, and regulators made a concerted effort over the weekend to ensure a smooth transition. According to Sifma, this collaborative approach inspires confidence in the successful implementation of the new rules.
A virtual command center opens a new tab, monitors implementation, and reports difficulties. Over 1,000 people will join numerous daily conversations, said Sifma managing director Tom Price.
The Depositary Trust and Clearing Corporation (DTCC), which clears and settles for Wall Street, will be converted to T+1 to speed up settlements. Still, banks, asset managers, and custodians must all change.
Is the U.S. the first to use T+1?
No. Trades were settled one day after India’s Securities and Exchange Board’s January 2023 phased-in changeover. India, along with China, wants a same-day T+0 stock and T+1 cash settlement.
Before the US, Canada, Mexico, and Argentina reached a one-day settlement on Monday,.
Mexico, for instance, accelerated its transition to T+1 to maintain correlation with the U.S. market, according to AMIB Administration Committee president Alejandro Félix. The global trend towards quicker settlements most likely had an impact on this decision.
Who follows?
Looking ahead, the British stock markets are aiming to switch to T+1 by 2027, and the E.U. has indicated that it will follow the U.S., although the exact timeline is yet to be determined. This suggests a global shift towards faster settlements, which could have significant implications for the U.S. market.
However, the transition to the T+1 settlement is not without its challenges. Financial businesses may require more time to raise funds to buy equities, recall loans, or correct transaction errors. This could potentially increase settlement failures and transaction costs, particularly in the forex market, which currently settles in two days.
What might go wrong?
As market participants adjust to the new, faster settlement period, it is possible that trade failures may increase temporarily. According to Sifma, this happened when the settlement time decreased from three to two days in September 2017.

According to Value Exchange’s poll, market participants estimate T+1 will raise the transaction fail rate to 4.1% from 2.9%. Price said Sifma expects a slight fail rate increase that will be rectified swiftly.

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