May 28 (Reuters) - The move to next-day settlement for

trading in U.S. securities on Tuesday will require

exchange-traded funds (ETFs) and the marketmakers to juggle

multiple jurisdictional requirements and capital needs, market

participants said.

U.S. trading moves to a shorter settlement on Tuesday, which

regulators hope will reduce risk and improve efficiency in the

world's largest markets, but is expected to temporarily increase

transaction failure for investors.

The biggest headache that many ETF issuers and their service

providers face is what happens when there's a "mismatch" between

when trades of the ETF wrapper -- the fund itself -- settle, and

the settlement schedule for the ETF's holdings traded outside of

the United States.

A U.S.-listed ETF will be subject to the new "T+1"

settlement rules but not all of the constituents of that fund

face the same parameters. Meanwhile, European ETF issuers will

have to wait for two days for buyers of their products to pay

but they will have only a single day to pay for new orders of

any ETF components that trade in the United States.

The primary impact will be felt by asset managers whose

funds include European holdings, since China and India already

have accelerated their settlement periods and Canada, Mexico and

Argentina also made the switch this week, said John Hooson,

managing director of ETF services at BBH.

"The majority of ETF issuers are dealing with this in some

way shape or form."

Such dislocations, he added, "will have to be solved with an

authorized provider posting additional collateral."

Authorized providers, the marketmakers who respond to ETF

orders by purchasing or selling baskets of shares, will have to

find ways to continue creating those ETF baskets in a timely and

cost-efficient manner, or see their cost of capital and need for

short-term liquidity increase.

Time zone differences may stress the settlement process

still further, said Todd Rosenbluth, head of ETF research at

VettaFi.

"That may lead to wider bid/asked spreads and reduced

liquidity as people try to address all these mismatches,"

Rosenbluth said. He added he expects this to be a short term

challenge that "will work its way through the markets over a few

weeks."

Robert Humbert, global head of ETF product at BNY Mellon

, one of the largest custodians and asset servicing firms,

said that about 30% of the order volume his company oversees

already settles on a T+1 basis, and expects that to bump up to

70% when the SEC-mandated rule change kicks in on Tuesday.

"Certainly, mismatching could be an issue for some but the

flip side is that T+1 ultimately is a more capital-efficient

process," Humbert said. Market participants "will only need to

hold capital for one day, not two."

Both Hooson and Humbert point to another area where ETF

market participants will need to adjust. Currently, marketmakers

manage their own inventories on a T+1 basis, in order to create

or redeem new ETF baskets on the old T+2 settlement cycle. The

change means those liquidity providers will now have to shift to

T+0.

Humbert, however, argues that the industry is prepared.

"We've spent the last 12 months working with ETF issuers and

their authorized participants to iron out problems," he said.

Rosenbluth agrees, noting that asset management firms "tend

to be very good at getting ahead of known and anticipated

events."