With less than one month to go before the T+1 deadline of 28 May 2024, brokerage firms across North America are preparing for the transition from securities transactions being settled in two business days – T+2 – to just one day. This will apply to transactions for stocks, bonds, municipal securities, exchange-traded funds, certain mutual funds, and limited partnerships that trade on an exchange.

What is T+1?

As the Securities and Exchange Commission (SEC) explained, “if you sell shares of ABC stock on Monday, the transaction will settle on Tuesday. That means that if you have a securities certificate, you may need to deliver your securities certificate to your broker-dealer earlier or through different means than you do today. If you hold your securities with your broker-dealer, your broker-dealer will deliver the securities on your behalf one day earlier. Similarly, if you are buying securities subject to the ‘T+1’ settlement cycle, you may need to pay for your securities transactions one business day earlier. If you have a margin account, the ‘T+1’ settlement cycle may impact certain provisions of your margin agreement.”

How did US securities markets plot their move to T+1?

In 2021, a report by the Securities Industry and Financial Markets Association (Sifma), the Investment Company Institute (ICI), and the Depository Trust & Clearing Corporation (DTCC) was released. This included plans that were established following working groups with over 800 participants from 160 organisations, including buy-side and sell-side firms, custodians, vendors and clearing houses. At the time, Sifma president and CEO Kenneth Bentsen, Jr., said: “As we saw during the industry move from T+3 to T+2, shortening the settlement cycle requires a collaborative effort from market participants across the industry, and the development of this report is a key step in making the vision of accelerated settlement a reality. We thank the industry representatives who participated in hundreds of hours of daily, remote working sessions to help us evaluate potential risks, understand the impacts, and develop a sound approach for implementation.”

What are the benefits of T+1?

Speaking with FinextraTV at Sibos 2023, Michele Hillery, managing director, general manager of NSCC equity clearing and DTC settlement service, DTCC, explored how the benefits of transitioning to T+1 can be categorised in a few different ways. “Certainly, there is an opportunity to take some cost out of the industry, and additionally, there is an opportunity to bring operational efficiency into the industry. If we look at this, firms have the chance to invest in their systems, they have the chance to bring automation to the systems. All of that, but take some cost out. At the same time, we know that time equals risk, so by shortening the settlement cycle by one day – we’re taking risk out of the system, the coverage for that risk period shortens and the cost of things like clearing funds on the sell side can be reduced.”

What are the challenges with T+1?

In a blog written by John Bevil from Xceptor, he mentioned that while there will be increased accuracy of settlements, “processing times can only be halved with market participants making wholesale modifications to infrastructure, technology, and established behaviours. Inevitably, such far-reaching transformation puts pressure on resources and ramps up compliance costs. Moreover, the risk of positions failing to settle in time – or at all – could result in losses, reputational damage, and the failure to secure highly sought-after client order the next time around.” While change of this scale will take great transformation, the opportunity that T+1 offers is worth it.

How does this impact settlement in other countries?

A 2023 report from Torstone Technology and Firebrand Research, based on perspectives from the buy-side, sell-side, and service provider market participants in the UK, highlighted concerns about the change. The research revealed that post-trade securities operations would need to be as efficient and automated as possible in a world with shortened settlement cycles. Major concerns included the middle-office confirmation and allocation crunch, asset servicing changes, and disruptions in securities lending flows. Further to this, firms outside of North America will be pressured to coordinate with time zones, with some smaller firms losing business if they do not act quickly enough.

Are other regions considering T+1?

The Australian Securities Exchange released a whitepaper this month that explored a move from T+2 to T+1 in Australia in light of countries like the USA, Canada, and Mexico set to transition to T+1 in May 2024 and India operating on T+1 since 2023. Significant markets including the United Kingdom and those under European Securities and Markets Authority (ESMA) supervision are - like Australia - actively exploring shorter settlement cycles. ASX is seeking stakeholder feedback by 18 June 2024 with the aim of publishing a summary of the feedback in August 2024 which will include next steps.

How can the capital markets industry prepare for a potential T+0?

As discussed by Justin Van Til, SVP of product, marketing and strategy at QUODD, T+0 or intraday settlement could be on the horizon. To prepare for this eventuality, he recommends having a “modern market data foundation in place as part of a firm’s overall back office architecture’. He continued that “organisations that may have previously settled for ‘band aid’ solutions have the opportunity to look under the hood and reevaluate their market data technology/vendor partnerships as part of that exercise. Given the critical role market data plays in keeping capital markets running, it is only going to become more important as we move toward T+1 settlement, and beyond.”