AIBC Forex: European firms adapt to meme stock fallout

In response to the meme stock mania, European fund managers and banks are racing against the clock to adapt to reforms in the US securities market, known as T+1 settlement. Failure to act could lead to complications in trading within the world’s largest capital market.

Urgent preparations for European institutions

European institutions held more than US$ 11 trillion of US equities and debt last year, making them vulnerable to the implications of T+1 settlement. The reduced timeframe will require quick resolution of operational issues, such as matching trades and FX settlement, with the risk transferred to operational and back-office processes. Small firms are faced with the challenge of adapting to these changes, while larger ones are shifting staff to the US and automating processes to meet the demands of the shorter settlement period.

Challenges and adaptations for European markets

The forthcoming US plan aims to reduce the settlement period for millions of share and bond deals from two days to one, commencing in May. This significant change in the US market structure has far-reaching implications for traders worldwide, particularly impacting interrelated markets like foreign exchange and cross-border ETFs.

Major structural change

This overhaul, scheduled to begin in May, reduces the settlement period for share and bond deals from two days to just one. It marks a pivotal shift in the US market structure, with implications reverberating throughout global markets, particularly in interlinked sectors like foreign exchange and cross-border ETFs.

The reduced timeframe means there will be minimal time to address operational issues and discrepancies, such as finding the necessary funds or assets and resolving local IT problems.

Institutional preparations become critical as institutions must swiftly adapt to the shortened settlement period, shifting operational and back-office risks. Larger firms are relocating staff to the US and automating processes to cope with the demands of a condensed settlement period, while smaller enterprises grapple with the associated costs and challenges.

As T+1 settlement will disrupt global financial markets and European fund managers and banks must race against time to ensure their readiness,

These changes will impact trading in the world’s most significant capital market.

Background

In 2021, the clearing house responsible for GameStop trading saw the need for a crucial change in the securities market. The Depository Trust & Clearing Corporation (DTCC) proposed reducing the settlement period from two days to one by 2023. The move followed complaints from broker Robinhood, who argued that the traditional two-day settlement process exacerbated issues during periods of market volatility.

This reduction in settlement time, now known as T+1, was supported by major market makers in the US, including Citadel Securities and Virtu Financial. DTCC, which cleared US$ 2,150 trillion in US securities deals in the prior year, consulted extensively with industry stakeholders before making this significant proposal.

The goal was to minimize risks in the system by shortening the settlement cycle, a challenge not without resistance but regarded as a necessary step in modernizing financial markets.

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