T+1 countdown - How APAC Firms can Overcome Timezone Constraints
Why 2pm is the golden time for Tokyo
It is now T-3 months until the US transitions to a shortened T+1 trade settlement period from a T+2 settlement period. With the May 28, 2024 deadline fast approaching, capital markets firms across the globe are scrambling to overhaul infrastructure and operational processes in order to become compliant.
Due to time zone differences, financial firms in the APAC region dealing in US-listed securities are facing considerably more headwinds than firms situated in other jurisdictions ahead of the transition. For example, the trade window for trade affirmations and allocations for firms based in Hong Kong will drop from more than 30 hours to roughly three hours after the New York market close. Crucially, this window will happen during the hours of 4am-7am, prompting many firms to either change their operational hours or relocate staff to the US. This reality will also require firms to deploy more efficient, automated trade systems across the front-to-back offices and even pre-fund transactions. More details on the operational difficulties being faced by financial firms can be found here.
However, despite the time zone constraints, GreySpark observes that APAC firms can still bide themselves sufficient trade settlement time when dealing in US securities, even after the settlement period has been reduced.
Source: GreySpark
GreySpark observes that firms based in Tokyo can maximise their trade settlement window if they trade after 2pm in Japan Standard Time (JST). As the figure above shows, 2pm in Japan corresponds to the start of the trading day in the US due to the 14-hour time difference. As a result, firms would be giving themselves 19 and 21 hours to allocate and affirm trades respectively. Executing trades after this hour ensures that the firm utilises as much time as possible on ‘T=0’ (the trade date) . When the trade fills around the US market open, which is around 11:30pm JST, the firm in APAC still has ample time in its night cycle to affirm and settle the trade. It is not advisable for financial firms in Tokyo to wait until the end of the New York session to execute trades, because this would leave the firm only a few hours to allocate and affirm trades before the deadline. Trades in US securities should, in this instance, be done after 2pm during Tokyo market hours.
Source: GreySpark
However, GreySpark observes a disadvantage for APAC firms trading in US securities before 2pm Japan Standard Time (JST) because this effectively shifts T+0 a calendar day earlier, causing the firm to not only fail to maximise the most possible settlement time available, but also miss the allocations deadline. For example, trading at 10am JST would cause a firm to miss the 7pm allocations deadline in the US by one hour, because this falls at 8pm EST. As such, APAC firms may refrain from trading in US securities before 2pm JST. Trading after 2pm coincides with the start of the trading date in the US, giving APAC firms 19 and 21 hours to allocate and affirm trades respectively.
Although time zone constraints will undoubtedly provide operational difficulties to APAC firms trading in US securities, there is a way for APAC firms to cushion the blow of the new settlement period and give themselves enough time to affirm and allocate trades.