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After move to T+1, Asia-Pacific asset managers face graveyard shift

Skyscrapers view in Shinjuku district. Tokyo, Japan.

Asset managers throughout the Asia Pacific region are facing a looming challenge as the US prepares to reduce its trade settlement cycle from T+2 to T+1 on May 27. Experts are warning that many firms in the region are not adequately prepared for this impending shift.

The transition to T+1 settlement brings forth several issues for asset managers who trade in US equities, American depositary receipts (ADRs), bonds, mutual funds, and exchange-traded funds (ETFs). Currently, there exists a significant gap of approximately 30 hours between the placement of a trade and its settlement, allowing ample time for processing. However, with the implementation of the new cycle, managers will only have a narrow three-hour window for trade settlements, raising concerns about operational efficiency and potential funding shortages.

In addition to the shortened settlement window, asset managers may encounter funding gaps as they rely on proceeds from one market to fund purchases in another. The discrepancy in settlement cycles between different markets could lead to mismatches in funding availability, thereby increasing market risks for managers.

To address these challenges, asset managers may need to explore alternative financing options or utilize futures contracts to hedge against settlement mismatches. However, such solutions come with additional costs, adding to the overall expense of investment in US markets.

Despite the impending deadline, a significant portion of Asia-Pacific investors remain unprepared for the transition. Industry reports suggest that nearly 60% of investors are still in the testing phase or not fully ready for T+1 settlement.

Given these challenges, asset managers are encouraged to seek out automated solutions to streamline trade processes and FX calculations. Automation can help alleviate the operational burden and ensure timely and accurate trade settlements.

While the shift to T+1 settlement presents significant challenges, asset managers must prioritize finding efficient and automated solutions to effectively adapt to the new trading environment.

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