Introduction:

The landscape of the US securities market is on the brink of a transformative shift as it gears up for T+1 settlement changes. The current T+2 settlement cycle, where securities transactions take two business days to settle, has been the industry standard for decades. However, regulatory bodies and market participants are now pushing for a more efficient and streamlined T+1 settlement cycle. This transition promises to bring about significant changes and benefits to investors, market intermediaries, and the financial system as a whole.

Understanding T+1 Settlement:

With the move to T+1, transactions will settle just one business day after the trade is executed. This reduction in settlement time is aimed at minimizing counterparty risk, increasing market liquidity, and enhancing overall market efficiency, but raises questions for all participants about what they need to change with regard to their internal processes to support the new timeframe.

Reducing Counterparty Risk:

One of the primary motivations behind the shift to T+1 settlement is the desire to reduce counterparty risk. Currently, during the two-day settlement period (T+2), market participants are exposed to potential risks arising from market movements and changes in the financial condition of counterparties. By shortening the settlement cycle to T+1, the industry aims to minimize these risks, providing a more resilient and secure trading environment.

Enhancing Market Liquidity:

A shorter settlement cycle is expected to contribute to increased market liquidity. Investors will be able to access their funds and securities more quickly, allowing for more agile investment strategies. This improved liquidity can benefit market participants by reducing the impact of price fluctuations and enabling faster capital deployment.

Operational Efficiency and Cost Reduction:

The move to T+1 settlement is not just about reducing risk and increasing liquidity; it also promises operational efficiencies and cost reductions. Market participants will benefit from streamlined processes, lower collateral requirements, and reduced operational complexities associated with a shorter settlement cycle. This, in turn, can lead to cost savings across the industry, making the entire trading ecosystem more cost-effective.

Challenges and Implementation:

While the benefits of T+1 settlement are clear, the transition is not without its challenges. Market participants will need to upgrade their systems and infrastructure to accommodate the faster settlement cycle. This includes adjustments to trading platforms, risk management systems, and back-office operations. The industry will also need to address concerns related to the synchronization of regulatory changes and the potential impact on smaller market participants.

Global Challenges

One of the major challenges for global firms will be misalignment of settlement cycles across the globe. The UK have commissioned a task force to look at accelerating to T+1 which is expected to publish a timeframe by the end of 2023. Typically, the EU is fragmented when considering a change to T+1 and latest estimates say it might be 7 years before they make it happen. Additionally, the existing timezone challenges of trading with Australia and New Zealand are exacerbated by the reduced settlement period. With the US, China, India, Mexico and Canada all transitioned or transitioning in 2023 firms will need to take a long, hard look at their settlement processes.

Regulatory Landscape:

The move to T+1 settlement has gained support from regulatory bodies such as the Securities and Exchange Commission (SEC). The SEC has been actively engaging with market participants to ensure a smooth transition and address potential challenges. The regulatory landscape is expected to evolve further as the industry moves towards T+1 settlement, with ongoing discussions and adjustments to facilitate a seamless transition.

Conclusion:

The impending shift to T+1 settlement in the US securities market marks a significant milestone in the evolution of financial market infrastructure. This move towards a faster and more efficient settlement cycle reflects the industry’s commitment to reducing risk, enhancing liquidity, and improving overall market resilience. While challenges exist, the benefits of T+1 settlement are expected to far outweigh the costs, ultimately ushering in a new era of efficiency and agility in the US securities market. As market participants prepare for this transformative change, collaboration between regulators, financial institutions, and technology providers will be crucial in ensuring a successful and seamless transition. We hope that this article is helpful in at least signposting some of the questions that need to be asked. City Integration have extensive experience of delivering complex change over the past 25+ years and have helped blue-chip organisations across the globe find the right answers, so please don’t hesitate to get in touch if you need some assistance