Wall Street Shifts to Faster Settlements; Bumps Seen Ahead

• U.S. trading on Tuesday moved to a shorter settlement cycle for securities transactions, putting investors and regulators on alert for increased trade failures and other hiccups in the world's largest financial market.
• Investors in U.S. equities, corporate and municipal bonds, and other securities must settle their transactions one business day after the trade, instead of two, to comply with a rule change adopted last February by the U.S. Securities and Exchange Commission.
• Regulators hope faster settlement will reduce risk and improve efficiency. They sought the new standard, commonly called T+1, after the 2021 trading frenzy around the "meme stock" GameStop highlighted the need to reduce counterparty risk and improve capital efficiency and liquidity in securities transactions.
• However, T+1 comes with risk since firms have less time to line up dollars to buy stocks, recall shares out on loan, or fix transaction errors, which could heighten the risk of settlement failures and raise transaction costs.
• A big test for the market occurs on Wednesday, when trades executed last Friday, when T+2 was still in place, and on Tuesday, the first day of T+1, will be settled. This is expected to lead to a rise in volume. "There will be some growing pains and a few hiccups," said Joe Saluzzi, co-head of equity trading at Themis Trading.
• Still, some market participants are concerned the change could transfer risks to other parts of the capital markets such as trade-related foreign exchanges to fund transactions and securities lending.

(Source: Reuters)