US regulators are set to overhaul settlement times
for securities trades next May. While this move is expected to have a positive
impact, it brings significant concerns for over $1 trillion in Exchange-Traded
Funds (ETFs). Market experts warn that the upcoming change will lead to
increased costs and operational complications, primarily affecting more than
500 US-listed funds that hold overseas assets.
According to a report by Bloomberg, this step could
pose challenges for ETFs, especially those holding overseas assets. As the
settlement time for transactions in ETF shares decreases from two days to one,
the underlying assets may still take two to five days to complete, depending on
their location. This creates a significant discrepancy in settlement times that
could result in double trouble for key players in the ETF market.
Liquidity providers play an important role in the
operations of ETFs. They ensure the smooth functioning of these investment
vehicles by arbitraging small price differences between the ETF and its
underlying assets. When the demand for an ETF is high, they create new shares
to sell by purchasing more underlying assets.
Conversely, when demand is low, they buy ETF shares
from investors and redeem them for the underlying assets. This process
typically works seamlessly for ETFs with US-listed assets. Still, it becomes
complex when dealing with overseas securities. If an ETF…