- Canada, Mexico, and Argentina have officially transitioned to the T+1 settlement cycle today, marking a significant shift in their financial markets.
- This move aligns these countries with the U.S., which will adopt the T+1 cycle tomorrow, aiming to enhance market efficiency and reduce counterparty risk.
- Tom Price from SIFMA expressed confidence in the transition, highlighting the extensive preparations made by market participants.
The transition to T+1 settlement in Canada, Mexico, and Argentina aims to reduce counterparty risk, improve liquidity, and align these markets with the U.S., enhancing overall market efficiency.
Canada, Mexico, and Argentina Embrace T+1 Settlement Cycle
Today marks the first day that Canada, Mexico, and Argentina will operate under the T+1 settlement cycle, a significant change aimed at reducing counterparty risk and improving market liquidity. This transition is part of a broader industry shift initiated by the United States, which will adopt the T+1 cycle tomorrow. The move to T+1, where trade settlements occur one day after the transaction, is expected to enhance market efficiency and provide a more secure trading environment.
Market Participants Prepare for the Transition
Major exchanges in these countries, including the Toronto Stock Exchange (TSX), Bolsa Mexicana de Valores (BMV), and Mercado de Valores (MERVAL), have been preparing for this transition for months. The preparation involved updating systems, training staff, and ensuring compliance with the new regulations. Tom Price, managing director and head of technology, operations, and business continuity at SIFMA, commented on the extensive efforts made by market participants to ensure a smooth transition. He emphasized the importance of reducing the time between the trade date and settlement date to minimize risk in the system.
WFE Warns Against Rapid Adoption of Blockchain in T+1 Settlement
Last week, the World Federation of Exchanges (WFE) published a research study cautioning against the rapid adoption of Distributed Ledger Technology (DLT) in T+1 settlement. The study highlighted the potential risks of using such technologies, including increased transaction costs and price impact due to settlement latency. The WFE’s research found that a one-minute increase in settlement latency could lead to a 1.3% increase in transaction costs and a 1.5% increase in price impact. This inherent latency introduces uncertainty into the settlement process, discouraging investor participation and deteriorating market liquidity.
Policy Implications and Market Design
The WFE’s findings have significant policy implications, particularly in shaping the market design of cryptocurrency infrastructure and exchanges considering different methods of speeding up trading time. The WFE insists that while DLT offers the promise of decentralized and swift settlement cycles, it also introduces uncertainty due to the unpredictable nature of settlement time. This uncertainty can negatively impact investors trading on such venues. The WFE advises policymakers and market operators to carefully consider the trade-off between near-instant settlement and market quality before implementing DLT.
Conclusion
The transition to T+1 settlement in Canada, Mexico, and Argentina represents a major step forward in regional market integration and risk reduction. While the move is expected to bring numerous benefits, including improved liquidity and reduced operational risks, the cautionary note from the WFE highlights the need for careful consideration of new technologies like DLT. As these markets embrace the T+1 cycle, the focus will be on ensuring a smooth transition and maintaining market stability.
