Tags: t1 | investor | trade | settlement

Investors Prepare to Embrace T+1 Benefits

Investors Prepare to Embrace T 1 Benefits
Traders on the floor of the New York Stock Exchange (Seth Wenig/AP)

Nigel Green By Tuesday, 28 May 2024 10:14 AM EDT Current | Bio | Archive

Investors are going to see significant benefits from the transition to a T+1 settlement cycle this week in financial markets.

For the first time in a century, trades will settle one day after the transaction date rather than the current two days.

This new regime, aimed at speeding up the process of traders taking ownership of stocks or receiving payment for the stocks they sell, is designed to reduce risk in the financial system.

However, there are also concerns about potential teething issues.

The primary advantage for investors is the reduction in counterparty risk.

With the settlement period shortened, there’s less time for any issues to arise that could prevent the transaction from being completed.

In volatile markets, where the financial status of counterparties can quickly change, this is a significant benefit. It ensures that investors are less exposed to the risk of a counterparty defaulting before the settlement.

Faster settlement means investors can reinvest their funds more quickly. This increased liquidity is particularly advantageous in dynamic markets, allowing investors to respond promptly to new opportunities.

We also expect T+1 will enhance operational efficiency for all market participants.

With fewer trades outstanding at any given time, there’s a lower admin burden, which can reduce costs and improve efficiency. For investors, this translates into lower transaction costs and faster resolution of trades.

By reducing the time it takes to settle trades, the new regime will create a more stable market environment, which will boost investor confidence, knowing that the system is designed to minimize risks and enhance the reliability of trade settlements.

But despite these benefits, the transition to T+1 isn’t without its challenges.

Individual investors and financial institutions will need to make significant operational adjustments. This includes upgrading systems and processes to handle the accelerated timeline. I believe there may be initial disruptions as firms adapt to the new cycle, and investors could experience temporary delays or errors during this period.

For investors dealing with cross-border transactions, the transition could be more even more complex with different markets operating in different time zones and may have varying settlement practices.

Aligning these differences within a T+1 framework is going to require careful coordination and could pose challenges initially as investors and institutions will need to adjust their funding and liquidity management practices.

The shorter settlement cycle requires more efficient use of resources, ensuring funds are available when needed. This could involve changes in cash management strategies and may initially strain smaller investors or firms not as well-prepared.

For investors to benefit fully from the T+1 settlement cycle, unsurprisingly preparation is key.

Understanding the new timelines and processes will help in planning and executing trades effectively and you should consider the implications of faster settlements on portfolio management strategies. This might include reviewing liquidity needs and ensuring sufficient cash flow to meet the new timelines.

As investors adapt to this change, the ultimate goal is to create a more resilient and efficient market environment that better serves the needs of all participants. It’s a landmark moment.

London-born Nigel Green is founder and CEO of deVere Group. Following in his father’s footstep, he entered the financial services industry as a young adult. After working in the sector for 15 years in London, he subsequently spent several years operating within the international space, before launching deVere in 2002 with a single office in Hong Kong. Today, deVere is one of the world’s largest independent financial advisory organizations, doing business in 100 countries and with more than $12bn under advisement. It specializes global financial solutions to international, local mass affluent, and high-net-worth clients. In early 2017, it was announced that deVere would launch its own private bank. In addition, deVere also confirmed it has received its own investment banking license.

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Investors are going to see significant benefits from the transition to a T+1 settlement cycle this week in financial markets.
t1, investor, trade, settlement
Tuesday, 28 May 2024 10:14 AM
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