Canada, Mexico, and Argentina will have their first day with the T+1 settlement cycle today as part of an industry shift initiated by the United States aiming to enhance market efficiency and reduce risk.
The shift to T+1, where trade settlements occur one day after the transaction, aims to minimize counterparty risk and improve liquidity in these markets when compared to the T+2 standard.
“Shortening the time between the trade date and settlement date reduces risk in the system”
Canada’s major exchanges, including the Toronto Stock Exchange (TSX), will operate under the new settlement cycle. In Mexico, the Bolsa Mexicana de Valores (BMV) has also adopted T+1. Argentina’s Mercado de Valores (MERVAL) similarly is completing the transition today, marking a significant step forward in regional market integration. The shift aligns these markets with the U.S. which will move to the T+1 cycle tomorrow.
The harmonization aims to facilitate cross-border trading and attract international investors by providing a more predictable and secure trading environment. Market participants, including brokers, clearinghouses, and custodians, have spent months preparing for the transition. The preparation involved updating systems, training staff, and ensuring compliance with the new regulations.
The move to T+1 is expected to benefit investors by reducing the time their capital is tied up in settlements. It also aims to reduce operational risks and enhance market stability, contributing to overall financial system resilience.
Tom Price, managing director and head of technology, operations, and business continuity at SIFMA, commented: “As we head into transition weekend and make final preparations for the move from T+2 to T+1 settlement, SIFMA’s members, along with our partners ICI and DTCC, have committed the time and resources to prepare, and that gives us a high degree of confidence as we proceed with the transition.
“We will be engaging in communications with the industry over the coming weekend and will assess how the work is going and address any issues which arise. Monday we will look to Canada, Mexico, and Argentina as those countries move to T+1, and on Tuesday May 28, we will be ready for the market open on the effective date of the U.S. transition. Shortening the time between the trade date and settlement date reduces risk in the system, and the industry has worked hard to prepare for this important change.”
WFE warns against use of blockchain in T+1 settlement
Last week, the World Federation of Exchanges (WFE) published a research study warning about the risks of adopting technologies, such as DLT, that radically reduce settlement time at the cost of market quality. The WFE Research team will present the study next Thursday, 30th May at 2 pm BST.
The research published by the global industry association for Exchanges and CCPs found that:
- When adopting technologies, such as DLT, the cost of making a trade increases, and the price reaction to a trade is intensified. For example, a one-minute increase in settlement latency leads to a 1.3% increase in transaction cost and a 1.5% increase in price impact.
- This increase isn’t a rare event, and some of our findings showed that settlement latency can easily vary by over 3 minutes, equating to a 3.9% increase in transaction costs and a 4.5% increase in price impact.
When there is uncertainty, informed traders will find it more difficult to execute their trading strategies and therefore pricing is less efficient.
WFE further explained that inherent latency in DLT settlement introduces uncertainty into the settlement process due to factors such as overall mining capacity, which affects block validation speed. Uncertainty discourages investor participation, resulting in a deterioration of liquidity and an increase in transaction costs, the association argues.
As to policy implications, these are substantial especially in shaping the market design of cryptocurrency infrastructure and, more broadly, for exchanges that are considering different methods of speeding up trading time.
The WFE insists: “DLT, with its promise of decentralized and swift settlement cycles, comes at the cost of introducing uncertainty due to the unpredictable nature of settlement time, which has negative implications for the investors trading on that venue.”
In conclusion, the WFE stated that policymakers and market operators should carefully consider this trade-off between near-instant settlement and market quality before introducing DLT. Markets with less uncertainty have increased liquidity and lower trading costs, the industry association added.
