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  • Writer's pictureThe San Juan Daily Star

Faster US stock settlement poses ‘systemic risk’ to Europe, asset managers say

Wall Street’s move to halve the time it takes to complete a stock trade will create a “systemic risk” in Europe unless market participants get more time to line up dollars for stock purchases, Europe’s asset management industry said on Thursday.

U.S. stock markets, along with those in Canada and Mexico, will require share trades to be settled within one business day (T+1) from the end of May, instead of two at present, which is the norm in Europe. The aim of the U.S. move is to reduce risk.

European fund managers’ group EFAMA said central banks and regulators should force foreign exchange clearer CLS to give European users more time to complete currency transactions to pay for U.S. shares under the new T+1 system. CLS is the largest multi-currency settlement system for FX trades globally.

“This urgency is further compounded by the fact that within days of the US go-live, major indices like MSCI World are set to rebalance,” EFAMA said in a statement, referring to reviews of a stock index benchmark, which means asset managers often need to sell certain shares and buy others.

EFAMA said a survey of member firms, which manage 28.5 trillion euros ($31.06 trillion) in assets, found that under the new U.S. T+1 settlement system 40% of asset managers’ daily FX trades would have to settle outside the safety of the CLS multi-currency platform.

“On a regular trading day, this could amount to $50-70 billion, whereas in volatile markets this figure could be in the hundreds of billions,” EFAMA said.

“This is of systemic importance,” EFAMA said, adding that the European Central Bank, as well as U.S. regulators and the Federal Reserve should require CLS to extend its “cut-off” for completing a currency transaction.

Increased FX settlement risk carries systemic implications, EFAMA said, citing the collapse of German bank Herstatt in 1974, which caused a major chain reaction across the world as it left large FX trades unfinished.

CLS said in January it wanted first to see the effect of the go-live in T+1 in May before considering whether its cut-off needed changing.

Some investment managers are looking to change the currency their funds do business in to the U.S. dollar to avoid being unable to settle U.S. trades on time as late trades are penalised.

U.S. stocks edged lower on Thursday, with chipmaker stocks extending losses for a second day, as a jump in producer prices left investors wondering if the Federal Reserve might wait longer than expected to cut interest rates.

Data showed U.S. producer prices increased more than expected in February as the cost of goods like gasoline and food surged.

Rate-sensitive utilities and real estate were the day’s weakest sectors.

The Fed is expected to leave rates unchanged at its policy meeting next week. The market has trimmed the odds of a cut for at least 25 basis points at its June meeting to 62.9%, CME’s FedWatch Tool showed, down from 81.7% a week ago.

“If we take inflation as a whole, we’ve had relatively hot inflation readings the last two months now, yet the market has kind of powered higher,” said Tony Welch, chief investment officer of SignatureFD.

“Fed policy may not be as loose as the market wanted it to be this year, but the prospect of further tightening still remains a low probability.”

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