Wall Street ushers in new era of faster trade settlement

(Reuters) -U.S. trading moved to a shorter settlement on Tuesday, which regulators hope will reduce risk and improve efficiency in the world's largest financial market but may temporarily lead to a rise in transaction failure for investors.

To comply with a rule change the U.S. Securities and Exchange Commission (SEC) adopted last February, 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, beginning Tuesday.

Here are some reactions:

JOHN OLEON, MANAGING DIRECTOR AT CLEAR STREET (a prime brokerage)

“Tomorrow and the next day are the big days … It comes down to customer allocations and affirmations and that won’t really wash itself out for the next few days.”

TED O’CONNOR, SENIOR VP, HEAD OF TREASURY SALES AT ARCESIUM

"I spoke to a number of my counterparts in the banking world and in the asset management world and one of the things that I have seen was there was an intentional effort to have a little bit more cash on hand to address any fails that may come out of this whole thing. I don't think it's a significant increase, but it's certainly enough to be able to address a normal settlement cycle that goes from two days to one.

"The mid-size, and the smaller managers are the ones that we're going to be watching closely because they tend to be more reliant on manual processes, on files coming from their custody agents and their prime brokers in spreadsheets or in PDFs … and their processes are much more people-driven rather than technology-driven."

JOE SALUZZI, PARTNER, CO-FOUNDER AND CO-HEAD OF EQUITY TRADING, THEMIS TRADING, CHATHAM, NEW JERSEY.

"It's probably too soon to tell. I think everyone is prepared for it. We've had things like this in the industry before, so you prepare for it, and then wait and see basically. I haven't seen anything new yet. We haven't had any problems. Hopefully it goes well.

There will be some growing pains and a few hiccups I would imagine... If there is something we'll all know pretty quickly. Tomorrow morning we'll see if anything happened. It's interesting because tomorrow it will be a settlement date for two trading days - Friday and today's.

You could have potentially some issues with extended settlements... But overall (T+1) is a good thing. When it comes down to why they did it, it's lowering the risk. When there's less time to settle, there's less risk."

NAWAN BUTT, HEAD OF CAPITAL MARKETS AT PURPOSE INVESTMENTS IN TORONTO

"Every single asset manager out there is going to be working very closely with their custodian today to make sure everything can settle as quick as possible. But as far as evaluating how the turnover has gone, that will require aggregate data which is at earliest month-end, most likely quarter-end."

"Throughout the day we will see if there are any issues. I believe most managers have been very proactive in making sure everything is booked properly ... There is a big value chain involved in this process and now we have to make sure that the t's are crossed and the i's are dotted and we'll be able to see what fell through the cracks."

JEFF NAYLOR, CHIEF INDUSTRY OPERATIONS OFFICER AT THE INVESTMENT COMPANY INSTITUTE:

“ICI has worked closely with our industry partners and regulators to ensure a seamless transition to a T+1 settlement cycle. To date, all T+1 implementation activities have been completed according to plan. We are now operating in a T+1 settlement cycle and are monitoring transaction flow. Wednesday is the last day market participants will settle T+2 transactions coupled with the first day of finalizing T+1 trades, and we are confident we will continue to see smooth execution.

“The US T+1 Command Center, co-led by ICI and SIFMA, operated throughout the weekend to confirm readiness among major market participants including DTCC, custodian banks, major broker/dealers, buy-side participants, and trading and infrastructure service providers to the industry. Additionally, ICI and SIFMA updated regulators throughout the weekend including the SEC, Federal Reserve Bank of NY, OCC, FINRA, and Treasury.”

SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION (published on website)

“Over the weekend, SIFMA’s T+1 Command Center was fully engaged with the industry, discussing among the designated participants such topics as conversion status information, transparency into the activity of other participants, and issue identification and socialization. That engagement will continue throughout the week. The industry has taken steps to be ready when the U.S. markets open today, which is the effective date of the transition to T+1 settlement, and we look forward to continued progress towards T+1 and helping investors and the industry realize the benefits of this change.”

NICK WOOD, HEAD OF EXECUTION AT MILLTECHFX AND MILLENNIUM GLOBAL:

“The shift to T+1 is expected to reduce settlement risk but comes with significant operational obstacles in the FX market. For example, in Europe, it’s estimated that $50bn-$70bn of daily FX flows will no longer be able to settle via CLS, a key component in managing settlement risk.

“Given that CLS has decided it won’t be changing the current cut-off times, after the US equity market closes there will be a much tighter window of just two hours to process transactions, execute the required FX trades to ensure dollars are available and submit the trades to CLS.

“Those without a local US presence and who would have historically executed the required FX trades the following morning may have additional unintended costs. They could end up extending execution and operational coverage into the late evening which will potentially add to staffing costs. This may also add to execution costs as they will be transacting during illiquid hours. Alternative solutions such as pre-funding could bring additional funding costs and utilizing their custodian due to workflow simplicity may bring higher costs via fees plus reduced transparency. Beyond this, the only other consideration would be to accept settlement outside of CLS.”

ERIC HUTTMAN, CEO OF MILLTECHFX:

“We expect most firms to make changes to staffing and explore automating or even outsourcing, but with same-day settlement looking increasingly likely, there is a significant amount of work ahead for FX operations professionals to ensure optimal workflows and a smooth transition.”

BNY MELLON (published on website)

"We welcome this positive move to reduce settlement risk and improve liquidity across the market. We will continue to closely monitor the transition and keep this site updated."

ALEJANDRO FÉLIX, PRESIDENT OF THE MEXICAN ASSOCIATION OF STOCK INSTITUTIONS' ADMINISTRATION COMMITTEE

"We live in a world that's ever more online. In an era where everything is characterized by its immediacy, it no longer made much sense to continue with last century's settlement mechanisms."

"On the one hand, there is such a high correlation between the American market and the Mexican market and, on the other, there is an enormous appetite among the investing public for stocks listed in the United States, which makes it very important to have the same settlement cycle."

(Reporting by the Reuters Finance and Markets team)