Trade settlement cycles will be transitioning from T+2 to T+1 in April 2024, aiming to promote market efficiency, strengthen investor protection and reduce counterparty and market risk. However, this change will present obstacles for Non-US ETF’s.
Many ETF’s that trade in the U.S. will now be cleared on a T+1 basis, while European-listed ETF’s will continue to be cleared on a T+2 basis. Therefore, any underlying securities domiciled in the U.S. will have settled the previous day.
These shortened cycles will leave less time to identify and eliminate mismatched data in the affirmation process. The timing mismatches will cause funding shortages that will ultimately be passed on to the investor.
According to Susan Yavari, Senior Regulatory Policy Adviser at European Fund and Asset Management Association (EFAMA), said that “ETFs were particularly exposed to the coming mismatch because of the way they work” and highlighted “the heavy burden being borne by investors outside the U.S.1” According to EFAMA’s data, "42% of the assets of UCITS equity funds are invested in U.S. equities. In contrast, just a sixth of the holdings of U.S. equity funds are estimated to be invested overseas."
According to Yavari, the potential fall-out is hard to predict. “There will definitely be an increase in the overall cost of trading for EU funds,” she said. “There may also be an impact on the appeal of U.S. securities, given all the associated issues, from an EU perspective.”
Firms will need to integrate straight through processing such as automated matching, clearing, and settlement delivery systems into their operational processes to handle the complex settlement processes of Non-U.S. ETF’s. IMP can help you plan for these settlement changes and the impacts it will have on your organization.
