Industry hit by ‘significant funding gaps’ after switch to T+1, Citi says #NewsMarket

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Many asset managers are having to cover large funding gaps following the switch to a shorter settlement cycle in the US earlier this year and the resulting misalignment with Europe, according to research by the securities services arm of Citigroup.

The reduction in 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 has found.

“Every area” of asset management businesses has been more impacted than originally anticipated, “from funding to headcounts, securities lending and fail rates”, the report said.

“It appears three months into the actual transition, while initially smooth around the go-live, firms are seeing more long-term negative impacts,” it added.

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

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

“With many asset managers and institutional investors having paid relatively little attention to T+1 in the preparation stages, the depth and impact of these funding challenges seem to have caught many by surprise,” according to Citi Securities Services.

Some 44 per cent of the 494 individuals surveyed — close to a third of which are based in Europe and 14 per cent working at asset managers — said they had been “significantly impacted” by T+1, up from 28 per cent a year ago.

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

Last month, Ignites Europe analysis of Morningstar data suggested the shift to T+1 could be having a negative effect for European investors, with average total returns for Europe-domiciled funds investing in US equities since 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 cutting 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 move to T+1 ahead of a potential 2027 switchover.

*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.