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As of May 28, 2024, the U.S. securities market officially transitioned to T+1 settlement, meaning most securities trades now settle one business day after execution instead of two. We are currently a year on from this significant change.
Here’s a look at the key impacts and observations one year on from T+1:
1. Risk Reduction and Capital Efficiency:
* Lower Counterparty and Market Risk: A primary driver for the move to T+1 was to reduce the time frame buyers and sellers are exposed to credit and market risks. With trades settling faster, there’s less time for prices to move adversely or for a counterparty to default.
* Reduced Margin Requirements: The shorter settlement cycle has led to a notable decrease in margin requirements at clearinghouses. For instance, the National Securities Clearing Corporation’s (NSCC) Clearing Fund reportedly decreased by 23% ($3 billion) compared to the T+2 environment. This frees up capital for market participants.
* Improved Liquidity: Investors receive proceeds from sales more quickly, which enhances liquidity and their ability to reinvest.
2. Operational Adjustments and Automation:
* Tightened Deadlines: The biggest operational challenge for firms has been adapting to the compressed timeline. Activities like trade allocation and affirmation now have significantly less time (e.g., trade affirmation reduced from 14.5 hours to 5 hours).
* Increased Automation: T+1 has acted as a catalyst for firms to accelerate their adoption of automation and straight-through processing (STP). Manual processes, which were more tolerable in a T+2 environment, are now a major hindrance and increase the risk of failed trades.
* Affirmation Rates: Industry data shows a significant improvement in trade affirmation rates on trade date, with overall rates reaching around 95% (as of September 2024), up from 73% in January 2024. This indicates successful adaptation to the new deadlines.
* FX Challenges for International Investors: A key concern, especially for investors in Asia and EMEA trading in US securities, has been the foreign exchange (FX) aspect. The shorter window for converting currencies and settling trades has required adjustments to FX practices, potentially leading to increased bilateral gross settlement and higher operational costs for some.
3. Industry Collaboration and Readiness:
* Extensive Preparation: The transition to T+1 involved years of rigorous and coordinated efforts across the industry, led by organizations like SIFMA, ICI, and DTCC. This collaborative approach was crucial for the relatively smooth implementation.
* “After-Action Reports”: Organizations have published reports detailing the planning, obstacles overcome, and initial impacts of the shift, providing valuable insights for future changes.
4. Global Ripple Effect:
* International Alignment: The U.S. move to T+1 has prompted other jurisdictions, particularly in Europe and the UK, to explore accelerating their own settlement cycles to maintain alignment and reduce complexities in cross-border transactions. Some countries in the Americas (e.g., Chile, Colombia, Peru) have already confirmed plans to move to T+1 in Q2 2027, and India implemented T+1 in early 2023, even introducing voluntary T+0 in March 2024.
* Continued Discussions: The industry is still actively discussing the implications for various market segments, including securities lending and repo, and how they will continue to adapt to the faster cycle.
In summary, one year on, the T+1 settlement cycle in the U.S. appears to have largely achieved its primary goals of reducing risk and improving capital efficiency. While it necessitated significant operational overhauls and continues to present challenges, particularly for international participants, the industry has demonstrated a strong ability to adapt and innovate in response to the accelerated settlement timeframe. This shift is likely to set a precedent for further settlement cycle accelerations globally in the future.

Video courtesy of ABN-AMRO

Video courtesy of ABN-AMRO