Brian McCabe Shares Insight Into T+1

The switch to next-day settlement will invite new operational challenges for funds that have securities with multiple settlement cycles in their holdings.

Asset management partner Brian McCabe told Ignites that the shift, known as T+1, will take place May 28 and present new challenges for foreign-exposed ETFs, because they redeem securities in kind.

Managing the different settlement cycles is harder for ETFs than mutual funds because ETFs redeem securities in kind while mutual funds do so in cash, Brian said. When an ETF redeems securities, authorized participants must post cash collateral worth more than the value of the in-kind securities. While participants wait for the securities to settle, they have to manage the size of the collateral and the associated interest rate.

That means that the costs funds must pay to authorized participants will shrink for U.S. securities, leading to a longer gap between the settlements of U.S. securities and foreign securities, Brian said.