In late May 2024, US and Canadian markets will transition the settlement cycle for securities markets from T+2 to T+1 days. Time frames for affirmation and matching of US securities trades will also change. What will this mean for New Zealand and what changes will those trading US securities need to make? David Callanan, Public Trust GM Corporate Trustee Services, explains.
Any person or company in New Zealand that trades US and Canadian securities will be affected by the US and Canadian regulators’ decision to transition the settlement cycle for securities markets. The cycle will change from T+2 (settlement 2 days after trade date) to T+1 (settlement 1 business day after trade date).
In addition, the time frame for affirmation and matching of US securities trades will move to 9pm EST on trade date.
Regulators at the time listed lower settlement risk, lower margin requirements, and greater available liquidity as the reasons for the change, which is effective 28 May 2024. But what will it mean for us here in New Zealand?
It will impact the New Zealand industry
The largest issue facing the New Zealand investment industry is the considerable challenges when working against the global clock. This update will change operational aspects within the market, and it may change the way some managers trade. It will also change how managers approach pre-settlement and choose to fund settlements.
Furthermore, the changes give rise to issues around holiday periods. Many managers will be considering whether to instigate black-out periods for trading. The impact becomes especially evident with end-of-week trading (e.g. New York close on a Friday is 11am NZ Saturday) and market holidays, especially extended holiday periods (Christmas and New Year) where NZ markets are closed for the entirety of the US market affirmation and settlement cycle.
The New Zealand investment industry also needs to consider the potential of other markets following suit. Australia, the UK and European markets are all understood to be considering a move to T+1.
NZ fund managers will need to make changes
New Zealand fund managers will need to relook at their operational processes in respect to US and Canadian market activity.
This will mean assessing if they can collate and affirm all new trades to their custodian between New York close and the 12 noon (NZT) cut-off, to meet the 9pm (EST) Depository Trust & Clearing Corporation (DTCC) affirmation window on trade date.
Those here will also need to look at what trades are undertaken after NZ market close Friday, given the flow on impacts:
· Confirmation and affirmation of trades would need to be completed on a Saturday.
· If the following Monday is a NZ holiday, how will managers pre-fund their settlement accounts?
· Do managers want to fund in NZD or USD? If NZD, do they have auto-convert capability set up with their custodian to settle their US trades?
· As noted earlier, managers may consider limitations to trading the day before extended holiday periods where affirmation and settlement in US markets would fall on public holidays in NZ. (i.e. trading on 24 December in US means affirmation in NZ on 25 December and settlement on 27 December, both potentially NZ holidays)
Potential penalties and other watchouts
The DTCC has suggested that trades not affirmed and matched by their 9pm (EST) cut-off on trade date can still settle on T+1, however they may be subject to penalties. At this stage, there has been no indication of what those penalties may be. Depending on how this develops, it is feasible that some managers may choose to accept the prospect of penalisation, rather than consider additional operational costs like Saturday operations.
We encourage market participants to talk to us about how we can facilitate affirmation and settlement processes in collaboration with sub-custodians. We also suggest early discussion and engagement on approaches to pre-funding, intraday settlement limits, and auto-FX conversion.
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