New York (Business Emerge), September 5: A recent shift to a faster settlement cycle for U.S. securities in May 2024 has had a more significant impact on global financial markets than initially expected, with European institutions bearing the brunt of the challenges, according to a survey by Citigroup.
The U.S. adopted a new T+1 settlement rule, reducing the time required for equities, corporate bonds, municipal bonds, and other securities transactions to be settled from two business days to just one. The transition, while intended to increase efficiency, has led to unexpected difficulties for a considerable number of market participants worldwide.
European Markets Face the Biggest Strain
The transition to T+1 settlement has been particularly challenging for European participants. Managing overnight settlement and funding issues has proven to be a major hurdle, as many foreign investors rely on currency trades to finance their U.S. securities transactions. The survey highlighted that these complexities in European markets were more severe than anticipated, causing a ripple effect on trading activities.
Industry-Wide Challenges Highlighted
The Citigroup survey, which gathered insights from nearly 500 institutions globally, revealed that 44% of both buy-side and sell-side firms found the shift to T+1 settlement far more impactful than expected. The effects were felt across various aspects of the trade cycle, from funding operations to staffing needs.
According to the survey, securities lending—where stocks or securities are loaned to other investors—experienced the greatest disruption, with 50% of institutions reporting an increase in challenges, up from 33%. Other areas, including funding and margin requirements, also saw notable impacts, with firms struggling to manage the new operational demands. Staffing levels were also affected as institutions had to reallocate resources to cope with the accelerated settlement cycle.
Disparity Between Buy-Side and Sell-Side
The survey further indicated that funding imbalances were felt unevenly across buy-side and sell-side firms. While both faced challenges, the sell-side appeared to be hit harder in some cases, particularly in managing liquidity and funding costs.
This global industry insight into the unexpected consequences of the T+1 settlement cycle highlights the broader operational shifts required as financial markets continue to evolve toward greater efficiency.