Shorter settlements force firms to reorganise their operations

Increasingly, markets are either adopting T+1 for equity trade settlements, or at least consulting with the wider industry about introducing it, with experts arguing such a move will help reduce risk and costs for trading counterparties. Nonetheless, this pivot away from the T+2 settlement cycle will require banks and brokers to invest heavily into updating their operational processes. SIX looks at the impact which shorter settlements could have on the financial services industry.

More markets pile onto the T+1 bandwagon


Despite some initial scepticism, India’s phased in transition of T+1 for equities – which was wrapped up earlier this year – has largely been judged a success. Next in line are the US and Canada, both of whom are expected to introduce T+1 in unison from the end of May 2024. As the biggest capital market in the world, the move to T+1 in the US is being closely monitored by intermediaries and investors globally.


Other markets are sympathetic to the idea of introducing T+1 as well. Last year, the UK Treasury created a taskforce to assess the case for adopting T+1, the conclusions of which will be published in December 2023. [1]


Although the EU led the way on rolling out  T+2 initially, it has kept relatively muted about T+1. There are several reasons behind its hesitancy. Aside from the fact that the euro has not been universally adopted by the EU-27, there are also dozens of national CSDs (central securities depositories) and other intermediaries scattered across member states, and many of them have contradictory stances on T+1.


In Europe, some stakeholders do not object to T+1, while others warn that a shorter settlement cycle can cause trade fail numbers to surge upwards, leading to more cash penalties being levied against financial institutions under the CSDR’s (Central Securities Depositories Regulation) Settlement Discipline Regime.


Amid this debate several associations have established T+1 taskforces, which aim to determine whether the EU should follow the US and other markets in shortening its settlement cycle.


Financial institutions face the impact of T+1


T+1 may be advantageous in some respects, but its implementation in the US (and elsewhere) will force banks and brokers to overhaul their operations.


AFME (Association for Financial Markets in Europe) highlights the scale of the challenge facing financial institutions. It says squeezing a two day settlement window into one day will result in there being 83% less time between trading and the start of the settlement cycle. [2] In practice, this means firms will have only two hours leeway to get on top of all of their post-trade operational requirements, instead of the 12 hours they presently have under T+2.



In other words, firms will have little time to carry out rudimentary asset servicing tasks, including making corrections and exceptions of settlement instructions. The problem will be compounded for banks and brokers located in distant time-zones (i.e. Europe, Asia) to that of the US, together with firms who are still dependent on legacy technology.


Let the T+1 preparations begin


T+1 is bound to create all sorts of operational complexities, but firms do have plenty of solutions available to them.


At the most basic level, banks and brokers need to start investing into their technology and operations. This will involve embracing automation – such as APIs (application programming interfaces), as this will make it easier for them to undertake trade confirmations, allocations and affirmations – together with FX in a T+1 environment.


Similarly, implementation of T+1 will usher in changes in terms of how corporate actions are processed. The shorter settlement cycle will also force financial firms to revisit the way in which they manage trade fails. Other considerations for companies might include finding ways by which to estimate funding and financing requirements throughout the day, and determining if they have the right tools to perform forecasts in real-time. If firms are to effectively navigate the T+1 transition, they need to be actively planning and testing their systems to ensure they can cope with the newfound changes.

Additionally, firms should also engage with their custodians, especially those which work off single ledger platforms. Providers that offer support in multiple markets are particularly well positioned, as they can help international clients with their T+1 obligations from different time-zones. SIX, for example, has multiple offices within Europe, Asia and North America, which enables it to respond quickly to queries from global clients irrespective of where they are based


By embracing digitalisation and collaborating with best in class custodians, financial institutions will be able to overcome whatever obstacles that T+1 throws at them.

[1] The Trade – December 9, 2022 – UK government sets up taskforce to explore shift to T+1

[2] AFME – September 21, 2022 – T+1 settlement in Europe – potential benefits and challenges