Financial Associated Press, May 25 (Editor Xiaoxiang) will be commemorated at the end of the war.Avet63After the short holiday weekend, the "Tunable 1 settlement era" for US stocks will officially begin next Tuesday. However, before the arrival of this epoch-making settlement mechanism reform, many Wall Street institutions were rather "uneasy"....
According to people familiar with the matter, Jefferies Financial Group sold at auction last month.Avet63A debt of about $3 billion was partly used to prepare for problems that might arise from the new settlement cycle rules that take effect next week.
The borrowing will help the investment bank build a buffer against any surprises in the stock quick settlement launch, which begins next Tuesday, these people said.
However, Jeffery officials have so far told the outside world only that the bond sale is for general corporate purposes. A representative for Jeffery declined to comment.
Earlier, the Securities and Exchange Commission (SEC) announced in March that, from May 28, 2024, the standard settlement cycle for US stocks would be shortened from tally 2 to tally 1, meaning that "stocks sold by investors on the same day will receive cash settled one working day after trading".
This has prompted banks, brokers and investors to conduct internal reviews to assess their ability to cope with change and to make sure they are prepared.
Advantages and disadvantages of Tunable 1 settlement
At present, U. S. stocks are traded in TX 0, but the settlement cycle is TX 2. In other words, investors can buy stocks on the same day and sell them on the same day, but it will take two days for the money to be available.
As technology plays a growing role in the market, the Securities and Exchange Commission has been reducing the time required for the settlement process-from about five days in the 1990s to the current Tunable 2 settlement system.
In a typical trading process, the broker deposits the collateral with the stock exchange clearing house, the depository Trust and Clearing Company (DTCC). In this way, if one party defaults, the other party to the transaction can also be protected. But if the customer fails to complete the transaction, the bank's funds will be taken up.
With regard to the benefits of further adjustment to Tunable 1 settlement, the SEC said the shorter settlement window meant that brokers had lower margin requirements and that the risk of high trading volume or volatility forcing brokers to limit trading would also be reduced.
For retail investors, the new settlement system can enable investors to keep abreast of their positions and understand the capital situation more clearly, and can quickly use the funds sold for new investments, improving the speed of trading and the efficiency of capital utilization.
Prior to this, U. S. Treasuries and U. S. stock options have been Tunable 1 settlement.
But similarly, the Tunable 1 settlement mechanism may also bring some operational risks. Most obviously, this will make the US different from many other countries in the world, where the typical settlement cycle for most countries is still Tunable 2. This change will require market participants to adjust their operating strategies and capital allocation in a timely manner to meet the challenge of halving settlement time.
Investors outside the US, in particular, need to adapt to this change as soon as possible-because the usual financing methods of subsequent transactions in the US take longer than they actually execute. Unknown parts of the transaction, such as confirmation, error correction and withdrawal of lent securities, must be carried out at least twice as fast. Many overseas institutions trying to buy US assets need to get dollars in advance to ensure they have dollars in time to complete the deal. Failure to do so may cause some purchases to fail completely.
In fact, some traders in foreign exchange markets are already worried that the reform of the mechanism could have an impact on global foreign exchange markets, especially during the usually lighter dawn in Asia. As the deadline for continuously contacting the settlement system (CLS) to large foreign exchange settlement platforms has not changed, it is still midnight central European time (6am Beijing time), and the settlement risk of foreign exchange transactions may also increase.
Wall Street is afraid to be careless.
Settlement failures are usually rare in modern markets, often due to technical problems or human errors. They can lead to regulatory penalties, losses of trading capital and, in rare cases, the collapse of trading parties when the transaction is large enough.
And many institutions are clearly worried that the Terror 1 system may increase the chances of settlement failure, because the compressed time frame may make errors more likely to occur, but also reduce the chance of correcting them. Crucially, it makes it harder for buyers and sellers to ensure that their funds and securities are ready.
"everyone will do their best," said Michele Pitts, global head of securities services escrow data at Citigroup. Settlement risk is likely to rise significantly in the first few weeks of the implementation of the new rules.
It is understood that Societe Generale, Citigroup, HSBC, UBS Asset Management, Baillie Gifford and other institutions have now said they are mobilizing staff, restructuring shifts or setting up new systems-in some cases all three-in preparation for the Terror 1 settlement conversion.
Amy Hong, global head of market structure and strategic cooperation at Goldman Sachs Group Banking and Markets, also pointed out at an event this month that "there is a lot of anxiety, even around technology and actual settlement methods." There will be some mismatches in terms of capital, and we need to solve some foreign exchange-related problems. "
JPMorgan's internal model shows that about 1/4 of the currency transactions it handles for clients are expected to be affected. Brown Brothers Harriman is conducting a "Tunable 1 simulation" on customers to identify customers with potential problems.
In a survey conducted in April and May by CoalitionGreenwich, a research firm, only 9 per cent of seller companies said they expected the conversion to proceed smoothly, 38 per cent warned that buyer managers were not ready, 28 per cent thought the trading platform was not fully ready, and nearly 1/5 expected a large number of or serious problems, causing great confusion.
It is worth mentioning that only three days after the settlement of US stocks took effect, the quarterly adjustment of MSCI's major stock indices around the world will also take effect, and one of the most influential trading days of the year is likely to put more pressure on markets that are still adapting to the new mechanism.