[ N E W S R E V I E W | T + 1 ] discount.
The key issue relates to the primary trades on T-1 funds whereby firms take global ETF trade orders on a T-1 basis using the closing price from the previous day given that some markets will already be closed thanks to the time difference.
If a broker is trading a global ETF in a secondary market on a T + 1 basis and they have to go to the primary market to place a creation to facilitate that settlement, that creation being done on a T-1 basis would mean that they would have to settle that creation trade T0 to match their settlement obligations for their secondary market trade on T + 1.
“ If we can’ t offer T0 then it’ s likely that those trades would automatically fail,” explains Goldie.
“ The price effect on ETFs containing US securities will disappear, however, when Europe migrates to T + 1 we will now have to try and settle T0 for primary trades on T-1 funds, which is something that we haven’ t had to do before. That we can do, but there’ s just certain operational considerations that we need to look at to be able to facilitate that.”
He adds:“ The reason it’ s more profound on a Thursday is because their creation trade with us or their hedge trade with the futures or the underlying stocks will settle Friday, but their trade with the client won’ t settle until Monday. Over that weekend they have to fund that cash position. When interest rates are high, that cost is obviously going to be larger on a daily basis.”
“ Rather than it be this pricing dynamic where on a Thursday you’ re buying ETFs tracking US securities at a premium, what you’ re going to see is a pricing dynamic on a Thursday for ETFs containing T + 2 securities when you’ re selling them at a discount.”
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