Move to T+1 in the US could force flows away from European trading hours

It’s those outside of North America who are feeling the implications of the US move to T+1, as one of the benefits of the European trading desk could diminish with settlement cycle fragmentation between regions.

A move to T+1 settlement in the US could move flows away from European trading hours, which benefit from being at the centre of the follow the sun model, and towards dedicated regional desks.

Traders operating in the European trading period currently benefit from an overlap with the Asia markets at the start of the day and an overlap with the US markets towards the end of the day meaning they can interact with interest from both regions.

However, a move to T+1 – as proposed by regulators in the US – could make cross-currency transactions more difficult because there is less time to interact with US counterparties – in particular for those asset managers who will have to wait until the end of the trading day to do their foreign exchange hedging making it too late to then trade in Europe.

As the markets are currently set up, the trade could then not be done the next day due to the cut off time for the FX transaction which is still on T+2 for US based equity that needs EUR or GBP funding.

“Moving to T+1 may move flows. The beauty of being in this part of the world is you can trade with lots of other regions etc Asia and US,” said Stephane Malrait, ING’s global head of market structure and innovation for financial markets, at FIX EMEA 2023.

“Moving to T+1 might see switch to having a US dedicated desk. We might move away from European time zone so we need to be careful.”

The US Securities and Exchange Commission (SEC) voted to shorten the settlement cycle to one business day, with the implementation date set for 28 May 2024, in February, and European and UK regulators have also been toying with the idea of potentially mirroring the move.

While there’s no official implementation date in Europe or the UK just yet, the UK government established an industry taskforce in December designed to examine the case for a transition to T+1 settlement, with initial findings to be published by December later this year.

One of the many reasons the US shift to T+1 is so significant is that it’s the first time the country has taken the lead among major markets on a reduced settlement timeframe. Therefore, the rest of the world now faces the challenge of adapting when their own respective markets are not on that cycle.

In Europe and Asia-Pacific, where firms will have to face the challenges of managing foreign exchange and securities lending, a recent survey from the ValueExchange showed that over half of participants are yet to define how they will manage critical areas post-transition. 

Participants have been quick to voice concerns over the move and the implications it might have for other asset classes and aspects of the market that will likely have to recalibrate along with settlement. Also noted at FIX EMEA 2023 was the potential impact on the repo markets which could now need to operate in real time and could now require the supply of lending instruments to be more liquid if the move to T+1 takes place.