By Nivedita Balu and Fergal Smith

TORONTO (Reuters) - Canada, Mexico and Argentina on Monday started to settle securities trades faster, halving settlement time to one day, in a move designed to reduce counterparty risk and improve market liquidity.

Settlement is the final stage of a trade, when buyers get their securities delivered and sellers are paid.

Market participants and regulators in the United States are paying close attention to the implementation of the so-called T+1 in Canada, Mexico and Argentina because Wall Street will shift to one-day settlement on Tuesday for equities, corporate and municipal bonds and other securities.

As global markets are highly integrated, any hiccups there could signalize potential issues for the United States too.

"Everything is bright green at this point in time. There are no issues and everybody is extremely optimistic," said Keith Evans, executive director of the Canadian Capital Markets Association, a federally incorporated industry organization.

Volumes will likely be up to 25% lighter than normal due to the U.S. holiday on Monday, making it "somewhat of an advantage" for Canada, Evans added.

In Argentina, Gonzalo Pascual Merlo, chief executive of local exchange operator BYMA, told Reuters that the change would further strengthen the country's capital markets.

"Implementing this measure brings clear benefits for the whole ecosystem, from liquidity providers to investors and other participants," he said.

A BYMA spokesman added that implementing the quicker settlement would "strengthen the friction-less arbitrage with other global markets and reduce counterparty risk in normal settlement, increasing security for capital markets participants."

Although regulators have been discussing the implementation of one-day settlement for a long time, it gained more traction after the 2021 trading frenzy around the "meme stock" GameStop (NYSE:GME) highlighted the need to reduce counterparty risk and improve capital efficiency and liquidity in securities transactions.

In China and India, the new standard is already in place, while Britain and the European Union plan to shift in the coming years.

The more countries or markets adopt T+1, the more efficient the faster settlement it will be for global investors.

Currency trades funding securities transactions currently settle in two days. Because of issues like this, regulators and market participants expect a temporary increase in trade fails. Research firm ValueExchange found in a survey that market participants expect the trade fail rate to increase to 4.1% after T+1 implementation from 2.9%.

"The next few days promise to be challenging," said Nawan Butt, head of capital markets at Purpose Investments in Toronto. "We have to spend the time to handhold all trades and make sure trade fail rates remain low as funding costs are quite high with the current interest rate backdrop."