Wall Street says shift to faster trade settlement smooth so far

USA-STOCKS/SETTLEMENT (UPDATE 3, PIX):UPDATE 3-Wall Street says shift to faster trade settlement smooth so far

Reuters
First Published29 May 2024
Wall Street says shift to faster trade settlement smooth so far
Wall Street says shift to faster trade settlement smooth so far

(Adds ICI comments, DTCC issues)

By Carolina Mandl and Davide Barbuscia

NEW YORK, May 29 (Reuters) -

The transition to a faster trade settlement cycle in the U.S. has so far gone smoothly, according to market participants and new data on Wednesday.

On Tuesday, U.S. trading of equities, corporate and municipal bonds and other securities moved to a one-day securities settlement cycle (T 1) from two days (T 2), to comply with a rule change adopted last February by the U.S. Securities and Exchange Commission.

The Securities Industry and Financial Markets Association (Sifma) said it was optimistic about the progress of the transition to faster trade settlement, while the Investment Company Institute said in a statement that "all T 1 implementation activities have been completed and appear to be operating normally."

"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 - or when trade 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 being affirmed was 92.76%, higher than Friday's 89.59%.

The higher the affirmation rate is, 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 has been agreed. It takes place after clearing and is handled by the Depository Trust Company, a subsidiary of DTCC.

Still, Stephane Ritz, a managing principal at consultancy Capco, said there were delays overnight in processing and preparing some trades for settlement at the National Securities Clearing Corporation (NSCC), a subsidiary of the DTCC. Ritz said that the issue had been addressed and orders had now caught up.

"There's no true real impactful issue there ... they addressed the issue on a very timely fashion," said Ritz.

DTCC did not immediately comment on the matter.

The shift to a faster settlement in the world's largest financial market is aimed at making market infrastructure more resilient, but it has put investors and regulators on alert for increased trade failures and other hiccups.

Wall Street is undergoing its first big test on Wednesday, when trades executed last Friday, when T 2 was still in place, and trades from Tuesday, the first day of T 1, are being settled. This is expected to lead to a rise in volume.

Market participants expect to see an increase in trade failure as the industry adjusts to the faster settlement 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%.

The U.S. follows Canada, Mexico, Argentina and Jamaica, which implemented T 1 on Monday.

In Canada, T 1 changes were implemented successfully and are functioning as expected, despite some isolated delays, which were addressed, a spokesperson for TMX, the owner of Canada's national securities depository, the Canadian Depository for Securities, said in an e-mail. (Reporting by Carolina Mandl and Davide Barbuscia, in New York; and additional reporting by Fergal Smith, in Toronto and Lewis Krauskopf, Editing by Rod Nickel, Megan Davies, William Maclean and Deepa Babington)

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