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T+1 settlement may lead to wider spreads, causing ETF investors to pay more

The planned move to shorter settlement times for ETF shares is likely to increase costs for some ETF investors. 

ETFs that hold both US and non-US securities will have to deal with different settlement times for different parts of those trades, which will likely cause authorized participants (APs) to face higher hedging costs, or to prompt them to tap short-term borrowing facilities. 

For in-kind creations and redemptions, the inability to settle non-US trades in time to deliver securities to the issuer on T+1 will increase the cost of the cash collateral that APs deliver to ETF issuers prior to settlement. With interest rates significantly higher now than in recent years, APs are already feeling the pinch of higher capital costs, so having to take on additional short-term borrowings to finance T+1 ETF trades will put additional pressure on APs.

The likely outcome is that APs will pass the higher costs on to investors in the form of wider bid-ask spreads.

Please reach out if you have questions about what's going on in the ETF space, including ETF capital market developments.

Participants in the $10 trillion exchange-traded fund (ETF) market say US changes to trade settlement times will throw different legs of the arbitrage trades at the sector’s core out of sync – with end investors shouldering the resulting costs.


etfs, etf capital markets, asset management