Faster US Settlement Hits Harder Than Expected, Citi Survey Reveals

By Laura Matthews

NEW YORK (Reuters) – A recent transition to a shorter settlement cycle for U.S. securities transactions has had a more significant impact on market participants than anticipated, according to a survey by Citigroup. Europe experienced the most substantial challenges as a result of this change.

In May, the United States implemented a new settlement cycle, requiring that equities, corporate and municipal bonds, and other securities transactions settle one business day after the trade (T+1), instead of the previous two days.

The Securities Services Evolution survey revealed that 44% of buy- and sell-side firms reported that the transition was "more impactful than expected." Europe faced particular difficulties in managing settlement and funding issues during early morning hours, as overseas investors rely on currency transactions to fund their U.S. securities trades.

Conducted in June, the survey included nearly 500 institutions and provided insight into the global industry response to the T+1 transition, highlighting its effects throughout the trading cycle. "Every area appears to have been more impacted than originally anticipated, from funding to headcounts, securities lending, and fail rates," the survey noted.

Securities lending saw the most considerable effects, with 50% of organizations reporting impacts, up from 33%. Other areas, including funding or margin requirements, staffing levels, and funding costs, were similarly affected.

"Funding has also been at the core of this impact — albeit with disparities between the sell-side and buy-side," the survey indicated. Around 56% of sell-side firms noted that their securities lending and recalls were "significantly impacted" by the shortening of the settlement cycle, addressing concerns raised by market participants prior to the implementation of T+1.

Furthermore, 52% of banks and brokers reported changes in staffing levels, suggesting a preference for hiring over automation has made the sell-side vulnerable to large volumes of manual processing and exception handling due to client demands.

Citigroup emphasized that more time is necessary to fully understand the "true, deeper" implications of the accelerated settlement cycle.

The Depository Trust and Clearing Corporation, the Securities Industry and Financial Markets Association, and the Investment Company Institute were key proponents of the T+1 change. While DTCC and SIFMA did not provide immediate comments, an ICI spokesperson noted that daily margin requirements dropped by nearly $4 billion in the immediate aftermath of T+1, potentially allowing managers to reallocate nearly a trillion dollars over the course of a year, which represents a substantial benefit for investors.