SIFMA, the trade body for the US securities industry, said it has a high degree of confidence on the move to a shorter settlement cycle due to the time and resources that have been spent in  preparation.

On Monday 27 May Canada, Mexico and Argentina are cutting their settlement cycles from two days after a trade, T+2, to T+1. On the following day, Tuesday 28 May, the US market will make that transition.

Tom Price, head of technology, operations, and business continuity for SIFMA, said in a statement: “As we head into transition weekend and make final preparations for the move from T+2 to T+1 settlement, SIFMA’s members, along with our partners ICI and DTCC, have committed the time and resources to prepare, and that gives us a high degree of confidence as we proceed with the transition.”

Price highlighted that 29 May will be a double settlement day, with trades from Friday 24 May settling T+2 and trades from 28 May settling T+1.

The Depository Trust & Clearing Corporation, the US post-trade market infrastructure, said in an email that  87.92% of transactions were affirmed by the DTC cutoff time of 9:00ET on trade date for the week ending 18 May 18. DTCC has previously said that the industry needs to achieve the 90% affirmation rate to be ready for the US shift to T+1. In August last year the DTCC opened its testing environment for T+1 and has been encouraging market participants to automate their post-trade operations to meet the deadline.

Guy Warren, chief executive at ITRS, which provides surveillance of IT infrastructures, said in an email that by most accounts, the industry is as ready as it can be for moving to T+1. Warren said one indicator of readiness is the success of multiple industry-wide testing cycles over the past year.

“Anecdotally, we haven’t seen any firms get caught off guard during the testing process, which suggests the necessary capital market functions can handle the accelerated settlement cycle,“ added Warren. “Likewise, major financial market infrastructures like the DTCC have been proactive in providing education and resources to ensure all participants understand the changes and can adapt accordingly.”

However, he continued that he expects “bumps along the road” as the industry adapts to T+1, and it is possible there will be a spike in the number of failed trades, operational glitches and additional costs.

Killian Lonergan, head of distribution intelligence at Brown Brothers Harriman, told Markets Media that most clients have been telling financial services group that they are prepared.

“We have been engaged with clients over a long period of time telling them this is not a US item, this is a global item,” Lonergan added. “We will see next week.”

As a result of preparing for T+1, Lonergan said clients now have a better understanding of the full end-to-end operating model.

“They have created a project team across silos to look at the worst case scenario and what they should be doing,” he added. “Hopefully, they will carry the skills they have developed onto other projects which is a positive from T+1.”

From a distribution point of view, BBH clients have been considering whether to change the trading settlement period of fund shareholders.

“We have seen far more managers entertaining the thought of what it would mean to move shareholder settlement to T+1,” Lonergan added.

So far, only a minority for fund managers have moved shareholder settlement to T+1, usually those who are very focussed on US equities, and most have stayed with T+1 according to Lonergan.

“This has given managers an opportunity to engage with multiple parties in their distribution chain and maintain those relationships as they are key to raising assets,” he added.”Managers should use these events that they cannot avoid as an opportunity.

Automation

Meeting the shorter settlement deadlines requires automation. Meritsoft said it has integrated Taskize’s collaboration and workflow functionality into its cross-asset trade tracking and exception manager (TTEM) platform, as shortening of the settlement cycle for equities and bonds will reduce the time to match by up to 80%.

Daniel Carpenter, chief executive of Meritsoft, said in a statement that the process of manually identifying and intervening to prevent or resolve a failed trade takes significant operational resources and still relies too often on emails and phone calls.

“In the context of T+1 and growing pressure to resolve settlement issues quickly, the integration of Taskize into our trade tracking and exception management system is a significant step in helping market participants to streamline their settlement processes.,” said Carpenter.

James Maxfield, chief product officer at data automation platform Duco, said in an email that moving to T+1 may mitigate risks in the trade settlement process, but it also  introduces additional complexity and potentially increased costs elsewhere.

Maxfield said: “Those that grasp both the challenge and opportunity presented by T+1 will navigate the transition more easily, enjoy its advantages and secure a means to gain a competitive edge.”

The move to T+1 also impacts on firms outside the US who have to execute foreign exchange trades due to the amount of overseas investment in US securities. The Investment Company Institute, which represents buy-side firms across the globe, ran an industry preparedness survey and found that nearly three quarters, 70% of respondent firms, said FX was the number one issue for them in T+1, especially issues around CLS.

CLS is the FX settlement infrastructure that was set up to reduce settlement and counterparty risk and currently has 18 eligible currencies. An EFAMA survey of European fund managers in March estimated that 40% of daily FX flows will no longer be able to settle through the CLS platform, which could be between $50 and $70bn, but could rise to hundreds of billions of dollars in volatile markets.

Warren said it will become clear for financial services firms over the next few months whether their technology is adequate for T+1. Although many firms have been using new technology to help relieve pressure from back-office staff, it is important that firms do not take their foot off the gas once T+1 goes live.

“Continuous investment in technology and ongoing improvements will be necessary to address any emerging issues and to maintain operational resilience,” Warren added. “While many financial institutions will have likely conducted regular stress-testing in the lead up to T+1, they should make sure to continue with ongoing risk assessment after the go-live. These assessments provide valuable insights into where enhancements or adjustments are needed to avoid IT hiccups down the line.”

Further reduction in settlement times

Other regions and countries are also cutting their settlement cycles in order to be more in line with the US, the largest financial market, and to reduce risk.

For example, the Jamaica Stock Exchange said in a statement that it will also move from  T+2 to T+1 on 27 May 2024 and has been working closely with its stakeholders over the past six months to implement the accelerated cycle. In addition, the stock market’s trading hours will be extended from 3.5 to five hours.

Dr. Marlene Street Forrest, managing director of the Jamaica Stock Exchange, said in a statement: “We are attentive to the needs of our investors, listed companies, brokers, and other stakeholders, and we respond to enhance our market’s advantages. We strive to align with global best practices and provide opportunities for growth.

The UK’s accelerated settlement task force has recommended a transition to T+1 no later than the end of 2027, and Chile, Peru and Colombia have all confirmed plans to move in the second quarter of 2025.

Pardeep Cassells, head of client experience for AccessFintech, which provides real-time data insights across financial markets, said: “The coming weeks will show us the impact of the varying levels of preparedness and will likely lead to further operational enhancements as the regulatory changes are felt.”

Cassells is also a member of the UK’s accelerated settlement taskforce. She said it would be challenging if the UK moves to T+1 cycle with the EU still on T+2, given the volume of cross-border trades that would be managed over a split settlement cycle.

“Otherwise, with a single market and single legal set up this could be a great opportunity for the UK to take this step forward whilst avoiding some of the complexity that will likely prove problematic for the EU,” she added.

In the European Union, regulator ESMA is holding a public hearing on the shortening of the settlement cycle from T+2 to T+1 on 10 July 2024.

“For the EU, with multiple CSDs and multiple legal frameworks in place across connected but independent markets, significant effort is required to gain consensus and create unified momentum,“ added Cassells. “In addition, the ongoing impact of the CSDR Settlement Discipline Regime (and its associated re-fit), may cause some reluctance to agree to a shortened settlement cycle any time soon.”

DLT

Further in the future, the use of distributed ledger technology would allow atomic settlement i.e. instantaneous delivery versus payment.

Todd McDonald, co-founder of enterprise distributed ledger technology and services firm R3, said in a statement that speeding up the settlement cycle for equities will impact other parts of market structure  and force firms to redesign workflows to meet the new requirements.

He highlighted that DLT offers the advantage of real-time settlement, but it also allows for settlement the next day, same day, or even multiple times per day.

“This is why the US, and other markets, should aim to shorten the settlement cycle without enforcing real-time settlement,” McDonald added. “This would help strengthen the market during periods of significant volatility, by reducing liquidity demands and lessening the amount of money that needs to be collected at any one time.”

The World Federation of Exchanges has also warned in a report that the risks of adopting such technologies could radically reduce settlement time at the cost of market quality. The report said a one-minute increase in settlement latency leads to a 1.3% increase in transaction cost and a 1.5% increase in price impact.

The global industry association for exchanges and clearinghouses added that the policy implications are substantial, especially in shaping the market design of cryptocurrency infrastructure and, more broadly, for exchanges that are considering different methods of speeding up trading time.

Kaitao Lin, senior financial economist at WFE, said in a statement: “Our research reveals a trade-off between near-instantaneous settlement and liquidity. Without trusted entity oversight, DLT introduces uncertainty which impedes liquidity. Policymakers must weigh these trade-offs and balance their impacts on different market participants.”