Traditionally, settling transactions has taken multiple days. In recent years, most securities transactions took two business days – resulting in the name ‘T+2’. However, in May 2024, the US Securities and Exchange Commission reduced the wait time for transactions to a singular day (T+1).
A month after the change was made, Rich Robinson, chair, ISITC (International Securities Association for Institutional Trade Communication) examines how the country and investment industry has responded.
T+1 settlement: A smooth transition with a few wrinkles
Rich Robinson, chair, ISITC
After years of planning and anticipation, the financial industry in the United States flipped the switch on the T+1 settlement cycle at the end of last month. This transformative shift, aimed at reducing risk and enhancing market efficiency, has been a focal point for market participants worldwide. Now, as the dust begins to settle on the initial implementation, it’s an opportune moment to reflect on how the transition has unfolded and what challenges lie ahead.
First and foremost, the good news. Despite the magnitude of the change, the transition to T+1 has been largely successful from an operational standpoint. The financial markets didn’t experience any catastrophic disruptions, and core post-trade processes continued to function as intended. According to feedback from ISITC members, the buy-side navigated the first week of T+1 without major hiccups, with affirmation rates by the 9pm cutoff on trade date now consistently exceeding 90 per cent in the US.
This relatively smooth transition is a testament to the industry’s meticulous planning and collaboration over the past three years. ISITC, in cooperation with organisations such as SIFMA, ICI, CCMA, and the Investment Association played a pivotal role in coordinating readiness efforts across the ecosystem. We brought together subject matter experts through thought-provoking panel discussions at our in-person conferences and facilitated in-depth problem-solving sessions at our T+1 Forum meetings over the past two years.
These initiatives were instrumental in identifying and addressing potential challenges well in advance of the transition deadline. The DTCC also made significant contributions to industry readiness, taking on the herculean task of educating market participants. They hosted over 500 training sessions, reaching more than 70,000 attendees since the SEC finalised the T+1 rule in February 2023. This comprehensive preparation undoubtedly mitigated the potential for widespread disruptions.
Challenges and issues
However, amidst these encouraging signs, the T+1 shift wasn’t entirely without obstacles – both foreseen and unforeseen. One prominent challenge that emerged was the compressed timeframes for affirmations, especially for firms in Europe and Asia-Pacific. Reports surfaced of missed deadlines and increased trade fails as these regions grappled with the new realities of T+1.
The implications of these time zone-related issues will necessitate close monitoring in the months ahead, especially to see if buy side trading volume trends have been impacted.
Operational frictions also came to light in the early days of T+1. Several ISITC members noted that lack of after-hours support, even from some larger brokers, caused delays for trades requiring late amendments.
Moreover, the industry witnessed instances of custodians passing on the DTCC’s 54 cent fee for unaffirmed trades directly to their buy-side clients – a development that sparked discussions around cost mutualisation. Legacy problems with account setups and standing settlement instructions triggered avoidable matching fails, while high volumes of incorrect confirms sent by brokers to custodians continued to strain the settlement process.
As we take stock of these initial findings, the key question is whether these issues are merely temporary “teething” problems or indicative of more structural challenges. Also, the impact on costs, especially for small and medium-sized firms, is unknown.
Can brokers, especially smaller firms, absorb the costs with adding more after-hours support, for example. Do these costs get passed on? Do these additional ‘hidden’ costs get outweighed by the benefits of the reduction in the guarantee fund? There were some positive signals amid the noise. For example, ETFs saw encouraging adoption of T+0 order cycles following changes implemented by NSCC.
Concerns about potential disruptions to securities lending and collateral management have not yet materialised, although it may be too early to draw definitive conclusions.
Looking ahead
Perhaps the most critical area to watch in the coming months is how small and mid-sized firms adapt to the operational demands and potential cost implications of T+1. The SEC‘s rule change was primarily targeted at mitigating broker-to-broker risk, but its impact has reverberated across the buy side as well. How these firms navigate the new realities of shortened settlement windows, increased affirmation pressures, and potential fee pass-throughs from their service providers will be a litmus test for T+1’s long-term viability.
Another important consideration is the downstream effect of T+1 on other market practices and asset classes. While the focus has primarily been on equities, the shift will inevitably impact fixed income, derivatives and cross-border trading as well. Harmonising settlement cycles across geographies and instrument types will be a complex undertaking, requiring close coordination between regulators, infrastructures and market participants.
There are also questions around the potential unintended consequences of T+1 on market liquidity and investor behaviour. Some have raised concerns that shortened settlement windows could deter certain types of investors or trading strategies. Monitoring any changes in trading volumes, liquidity profiles and market participation will be critical to assessing the full impact of the transition.
Industry feedback is critical
At ISITC, we’re committed to closely monitoring the industry’s progress and pain points in the post-T+1 world. In the immediate term, we plan to conduct comprehensive surveys to gather feedback from our members and the broader industry.
These insights will help benchmark the state of play and surface any persistent challenges that need to be addressed. We also look forward to facilitating further dialogue on T+1 at our upcoming conference in September, which will bring together key stakeholders from across the investment lifecycle.
Ultimately, while the T+1 transition has been largely successful from a “go-live” perspective, it’s clear that the journey is far from over. The real work of optimising processes, technologies and behaviours for a T+1 paradigm is just beginning.
By fostering ongoing collaboration and problem-solving across the buy-side, sell-side, custodians and market infrastructures, we can collectively work towards realising the full potential of shortened settlement cycles. Because in the ever-evolving world of capital markets, standing still is not an option.
The post Now the Dust Has Settled on the US’ T+1 Transition, What’s Next? appeared first on The Fintech Times.
