Well, That’s Settled

It’s not every day that the future of our industry is pulled a full day closer, but that is exactly what will occur when “T+1” goes into effect in Canada and Mexico on May 27, and a day later? in the US on May 28.

For the uninitiated: T+1 is industry shorthand for Trade Date plus one business day, with these dates signaling a regulatory requirement for the shortening of standard securities settlement cycle from two business days, or T+2, to one. (The timing of potential migrations to T+1 across EU Member States has yet to be determined, although it is likely to occur several years from now.)

What are the implications of this abbreviated settlement cycle for investors and the finance? industry writ large? Moving trades more quickly to settlement helps enhance risk management and drive operational/cost efficiencies, with primary benefits that include: decreasing length of exposures to trading counterparties, lowering margin requirements for clearing members, reducing markets risk and liquidity demands (esp. during periods of high volatility), and infrastructure modernization and standardization. Significant challenges for market participants, however, include international time zone pressures, and greater risk of settlement fails and penalties.

With our 232-year history and commitment to innovation, 美国道富银行 has been at the forefront of many industry transformations. Moreover, as one of the world’s largest asset servicers, we see just over 10% of the world’s assets* flowing through our infrastructure daily, which allows us to see what others cannot. Our unique view into institutional investor fund flows helps us fashion portfolio capabilities that speak directly to issues investors are likely to face related to shortened settlement.

Whether clients are managing T+1 impacts on ETFs, offsetting FX exposures, or looking for secured financing solutions to manage funding, State Street is their trusted solutions provider. In the weeks and months leading up to this seismic regulatory shift, we have been busy partnering with our clients to provide them the tools and education necessary for the shift to T+1, help them think about both the immediate impact of the shortened settlement cycle as well as the broader implications, and help future-proof their operating models. To prepare for this regulatory shift, we established an extensive cross-organizational T+1 program supported by executive-level sponsors, steering and operating committees, and workstreams covering relevant business lines and functions. We have invested heavily in new technologies to bring real time or close-to-real time capabilities to our clients.?

Though T+1 implementation carries varying implications for different asset classes, in the interest of space, let’s take a closer look at T+1 operational and business impact on exchange-traded funds (ETF), that most democratic and increasingly popular of investment vehicles. As creator of the first US-listed ETF, the world’s largest ETF service provider, and an ETF innovator for over 30 years, State Street is well-equipped to explain the knock-on implications of T+1 settlement to ETF investors—and provide a controlled, automated, and expedited solution built to accommodate the nuances of the ETF lifecycle to meet the new demands of an accelerated settlement cycle.

ETFs are offered across two distinct markets (primary and secondary) accessed by unique groups of investors for distinct reasons. The secondary market is used by most retail investors to trade in the ETF at the prevailing market price. The primary market is used by self-clearing broker/dealers, called authorized participants (APs), to support large institutional block trades and ETF liquidity needs. Shares in ETFs typically take longer to settle than most equities and other securities as they involve the transfer of the underlying securities. This complexity—which can involve illiquidity of asset classes, local emerging market exposures, and time zone issues—is best managed with a full service set of ETF solutions that include:

• Customized basket creation, calculation, and dissemination, along with fully automated processing and straight-through processing for rebalancing and restricted trades
• Transfer agent capability in many jurisdictions, which verifies that ETF units are reconciled to the Depository Trust & Clearing Corporation daily
• Risk and portfolio accounting systems for data transfer for our partners, and market-leading trade order management

State Street worked with the industry to design and implement the necessary operating models and technology to support expedited ETF share minting and settlement in the primary market. These tech and operational enhancements should allow ETFs to continue to trade daily and efficiently in a T+1 environment as this most versatile financial instrument always has.

Mind you, day one of T+1 is not expected to be a “Y2K moment,” meaning it isn’t just about the change in the market that first week. Rather, any disruptions to settlements, cash availability, financing needs, and other implementation impacts will likely continue to occur over weeks and months. State Street is keenly proud of the infrastructure and development work we’ve done to make ourselves operationally ready for this regulatory shift, and the full-throttle client engagement we have put behind this effort to help our partners and our industry embrace T+1 as painlessly as possible from the start.

While eagerly anticipating Memorial Day weekend here in the US, we look ahead to the days that follow in the hope of celebrating this huge industry shift with a collective, “well, that’s settled.”

*Represents State Street AUC/A divided by Global Financial Assets, including Global Equity, Global Debt Securities and Global Broad Money (M3), as of December 31, 2022. Sources: SIFMA, OECD, World Bank. This represents State Street’s assets under custody and administration AUCA (USD$43.9T) as of March 31, 2024.