Industry hit by “significant funding shortfalls” after shift to T+1, Citi says

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Many asset managers are struggling to cover large funding gaps as a result of the move to a shorter settlement cycle in the US earlier this year and the resulting misalignment with Europe, according to research by Citigroup’s securities services arm .

The reduction of settlement cycles in the US from two days after the trade date to one day, or T+1, has proved “harder than expected”, Citi Securities Services found.

“Every area” of the asset management business was more affected than initially anticipated, “from financing to headcount, securities lending and failure rates,” the report said.

“It appears that three months into the effective transition, while initially smooth during rollout, firms are seeing more long-term negative effects,” he added.

This article was previously published by Ignites Europe, a title owned by FT Group.

Asset managers, for example, saw their funding costs worsen, with 46% of respondents saying they had to cover “significant funding gaps during the settlement process” as they navigate between T+1 and T regimes +2, such as EU and UK.

“While many asset managers and institutional investors paid relatively little attention to T+1 in the build-up stages, the depth and impact of these funding challenges appear to have caught many by surprise,” according to Citi Securities Services.

Some 44% of the 494 people surveyed – nearly a third of whom are based in Europe and 14% work at asset managers – said they were “significantly impacted” by T+1, up from 28% previously with a year. .

The misalignment between EU and US settlement cycles has been blamed for increasing trading costs for European fund managers, which ultimately dampens returns for investors in the bloc.

Last month, Ignites Europe’s analysis of Morningstar data suggested that the shift to T+1 could have a negative effect on European investors, with average total returns for European-domiciled funds investing in US equities as settlement cycles were reduced in the US lower than for US Vehicles in the same asset class.

EU policymakers are currently considering whether the bloc should follow the US in reducing settlement cycles from T+2 to T+1.

The European Securities and Markets Authority is expected to publish its recommendations in the coming months on whether the EU should switch to T+1 ahead of a potential switch in 2027.

*Ignites Europe is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at igniteseurope.com.