The US move to T+1 settlement was passed through in a bid to increase the efficiency of market operations, however an Acuiti report has stated that 53% of asset managers believe that the move will not make US equities more attractive.
With the significant change in market structure less than a year away, some respondents confirmed that operational complications are unavoidable, with non-US investors highlighting where changes will be focused.
Over half (53%) pinpointed end of day processes – allocations, confirmations and affirmations – as the main challenge, while 37% highlighted FX hedging and settlement, and 11% indicated pre-trade technology.
The US Securities and Exchange Commission (SEC) voted to shorten the settlement cycle to one business day back in February of this year, with the change occurring on 28 May 2024.
Ross Lancaster, head of research at Acuiti, highlighted the role of technology in addressing these issues: “As many asset managers look to change how they position in markets, there is also a need for investment to support the systems needed to put this into place as efficiently as possible.
“At the same time, firms are preparing for a new wave of regulatory change. European authorities are preparing EMIR 3.0 and those that trade in US markets are moving towards T+1 settlement, both of which present significant challenges to asset managers,” he added.
In terms of these regulatory consideration, around half of the asset managers surveyed confirmed that they are awaiting further guidance on EMIR 3.0 before making changes – with lack of clarity highlighted by a portion of respondents as the main barrier to compliance.
Last December, the European Commission (EC) published a proposal as part of Emir 3.0 regulation which if passed would obligate all participants to hold active accounts at European CCPs for clearing at least a portion of certain derivative contracts.
Of the remaining respondents, when asked how the EC’s mandate for clearing Euro swaps is altering their approach to clearing Euro-denominated products, 38% confirmed that they had already moved ‘some or all’ of its Euro swaps to an EU CCP, while the remaining 13% confirmed that they are ‘actively considering’ moving some of their Euro swaps to an EU CCP.
The Acuiti report also emphasised how the Derivatives Trading Obligation (DTO) that emerged under MiIFD II has “changed the pattern of execution for many firms, who now have to check if their counterparties can clear before trading (and risk having to cancel trades)”.
With this in mind, the report asked respondents how the DTO had changed the process of price discovery for firms. Of those surveyed, 38% responded that they had reduced their volume of voice execution and 33% confirmed that have had to increase pre-trade checks with our counterparties. Just 29% answered that DTO had not had an impact on their trading patterns.
Elsewhere, when asked about enhancing headcounts in different areas of the business in a bid to keep up with the changing landscape, the majority of respondents highlighted operations and business development as the focus, however, a third of surveyed asset managers highlighted ‘traders’ as the area in which they plan to increase headcount, followed by ‘compliance’.
Looking at where the most opportunity for growth in profitability lies for asset management firms for over the next 12 months, responses revealed that ‘deployment of new strategies’ is top, closely followed by ‘investment in technology’.
“After a challenging 2022 and first half of 2023, asset managers have continued to grapple with the unpredictable market conditions caused by rising interest rates. These shifts have led to reviews of asset allocation and trading strategies, as well as an increased focus on risk and collateral management,” said Lancaster.
Acuiti’s report is the first since the launch of its global asset management expert network – comprised of senior derivatives-focused asset management executives. According to the business, the network “provides a virtual forum through which senior executives can gauge sentiment and benchmark approaches to common challenges”.