Peter Snasdell, senior vice president at Devexperts, discusses the challenges Market players face with the recent shift to T+1 settlement times in the US, Canada, and Mexico. This change means transactions are settled the day after they occur, aiming to reduce risks and enhance Market efficiency. However, quick settlement times present obstacles, particularly for international investors dealing with time zone differences and currency exchanges. While some countries, like China and India, have moved to even faster settlement cycles, others like Europe are still adapting. To keep pace, financial systems will need upgrades and more automation to support these quicker transactions effectively.
Peter Snasdell, senior vice president at Devexperts, recently shared insights on the challenges faced by Market participants as settlement times are shortened. With the shift from T+2 to T+1 settlement in North America beginning in May 2024, many are now wondering how this will affect trading efficiency and risk management.
The Purpose of Shorter Settlement Times
Shortening settlement times is aimed at reducing counterparty risk. When transactions take longer to settle, there’s a greater chance that the price of a security will change, potentially harming investors. While T+5 settlements were common in the past, T+2 was implemented in 2017, and the transition to T+1 reflects a push towards increased efficiency.
Challenges That Come With T+1
However, moving to T+1 isn’t as simple as it sounds. Swift, a key player in financial services, emphasizes that cutting down settlement times doesn’t just halve the processing time. For banks and brokers, it means they have significantly less time—about 80% less—when handling cross-border settlements, especially given the complexities of different time zones and foreign exchange needs.
Specific Impact on International Investors
International investors, particularly those in the Asia-Pacific region, will need to adapt quickly to these changes. They may have to finalize foreign exchange transactions earlier or pre-fund their accounts to ensure smooth trades. The legacy systems and manual processes that remain in many older markets can complicate this transition.
In fact, some newer markets like China and India offer instant T+0 settlement, contrasting sharply with Europe, which is still on T+2 and is aiming to shift to T+1 by 2027. This difference highlights the progress made by countries that introduced modern systems without the burden of outdated infrastructure.
The Role of Technology in Smooth Settlements
The conversation surrounding shortening settlement times also touches on fintech solutions, including the use of blockchain technology and central bank digital currencies (CBDCs). While cryptocurrencies have shown potential for instant settlements, achieving similar efficiencies in traditional markets will require significant upgrades in technology and processes.
In conclusion, while moving to T+1 settlement times presents opportunities for improved Market efficiency, it also introduces a range of challenges. Market participants must prepare for these changes, leveraging technology to ensure smoother and more secure transactions.
Tags: settlement times, trading efficiency, counterparty risk, international investors, financial technology.
What does T+0 settlement mean?
T+0 settlement means that the buying and selling of securities is completed on the same day. This helps investors become owners of their investments right away.
What are the benefits of T+0 settlement?
The benefits of T+0 settlement include faster access to funds, reduced risk of fraud or price changes during a waiting period, and a more efficient Market overall.
What obstacles might come with moving to T+0 settlement?
Obstacles include the need for better technology, changes in regulations, and ensuring that all Market players can handle the same-day process effectively.
How does T+0 settlement affect investors?
T+0 settlement can help investors by allowing them to use their money more quickly. However, they might need to adjust to a faster pace in trading and manage their funds more actively.
Is T+0 settlement likely to happen soon in the Market?
While interest in T+0 settlement is growing, moving to this system will take time. It requires careful planning and cooperation from different parts of the Market.