SEC Urges UK to Shorten Currency Trading Settlement Time

SEC Urges UK to Accelerate Currency Trading Settlement Times

The Securities and Exchange Commission (SEC) is urging the UK to expedite the settlement time for currency trading to align more closely with Asian and North American markets. Gary Gensler, the SEC Chair, recommends the UK to consider extending the next-day settlement (T+1) for securities transactions to encompass more asset classes and further reduce settlement times.

The US, Canada, and Mexico have already transitioned to halve the settlement time for securities from T+2 to T+1. This move has increased pressure on global currency traders, particularly those in the UK, who must now navigate trading across different time zones and countries to comply with the new US market requirements. Gensler advocates for early discussions with central banks to explore the possibility of shortening the currency trading settlement cycle.

Key Takeaways

• SEC Chair Gary Gensler advocates for the UK to shorten currency trading settlement time.
• The UK aims for T+1 settlement by the end of 2027.
• US, Canada, and Mexico have already transitioned to T+1 settlement.
• Faster settlement reduces margin requirements by $3 billion, enhancing market stability.
• Shorter settlement cycles improve liquidity and market resilience.

Analysis

The SEC's push for shorter settlement times in the UK aligns with the T+1 model adopted by the US, Canada, and Mexico, intending to enhance global market liquidity and reduce systemic risk. This shift may compel UK traders to adapt to faster cycles, impacting operational strategies and potentially increasing efficiency. Involvement of central banks in these discussions is crucial for aligning regulatory frameworks. The transition, if successful, could potentially lead to reduced margin requirements, thus benefiting clearinghouses and stabilizing markets. However, UK financial institutions must brace for operational challenges and potential short-term disruptions in adapting to the new settlement norms.

Did You Know?

• T+1 Settlement: This refers to a settlement process where securities transactions are completed and settled one business day after the transaction date (T). This is faster than the traditional T+2 settlement, where transactions are settled two days after the trade date. The shift to T+1 aims to reduce counterparty risk, enhance liquidity, and align with global market practices, particularly in North America.
• Counterparty Risk: In the context of securities trading, it refers to the risk that a seller won't deliver the securities or that a buyer won't pay for them as agreed. Shorter settlement cycles like T+1 help mitigate this risk by reducing the time between the trade and the settlement.
• Clearinghouses: These financial institutions facilitate the settlement of trade transactions by acting as intermediaries between buyers and sellers, ensuring that the obligations of both parties are met and managing the risk associated with trades. Reducing settlement times can decrease the margin requirements at clearinghouses, as seen in the transition from T+2 to T+1 in the US, thereby lowering the overall risk and cost of trading.