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The United States, the world’s biggest and most liquid capital market, will transition to T+1 settlement for transactions in US equities, corporate debt and unit investment trusts as of 28 May 2024. Canada will make the change the day before as they seek to stay aligned with their larger neighbour. While not the first jurisdictions to do so – a phased switch to T+1 settlement for India’s equity markets was completed in January 2023 – the US move will have huge global ramifications, for both industry participants and other markets.
Settlement cycles have been progressively shortening around the world for years, with most developed markets now operating on T+2. The changes required for T+1 are of a different order of magnitude though.
Shortening the settlement cycle aims to create more efficient markets that serve investors better. The prospective benefits are substantial.
The main driver is to reduce the pre-settlement risk of counterparties not delivering on settlement date. Where that risk has been margined, as with transactions cleared at central counterparties (CCPs), decreasing the risk in turn decreases the margins and associated capital required. Capital efficiency and liquidity improve, and costs are reduced – with the US Depository Trust & Clearing Corporation (DTCC) estimating that removing one day’s exposure to risk could translate into a 41% reduction in the volatility component of CCP margin requirements.
In an increasingly real-time world, T+1 settlement will also help keep traditional financial markets relevant and attractive to investors. The execution through settlement phases will need to be automated and modernised to enhance straight-through processing and minimise exceptions. While that will take investment, it will strip out manual workflows and bring operating efficiencies, cost savings and risk reduction.
On the flip side, the challenges, and costs to overcome them, are significant. As a report by the Association for Financial Markets in Europe (AFME) observed, moving from two days to one is not a halving of the available post-trade processing time. In reality, AFME estimates market participants will go from approximately 12 core business hours between the end of the trading window and start of the settlement window down to two hours, an 83% reduction. Many processes will need to take place on trade date as a result, risking an increase in settlement fails.
The post-trade time compression will be particularly difficult for investors trading across time zones. Operational risk will increase, since they have a shorter window to resolve any breaks or exceptions. Non-harmonised settlement cycles across different markets could exacerbate overnight funding requirements as well, for example if an investor is waiting for cash from one market to pay for securities in another.
T+1 will also have a knock-on effect on stock lending and borrowing. With less time to identify and recall loans, settlement fails and resulting penalties may rise. Whether T+1 reduces or increases stock lending remains to be seen, but one concern is it will push out some of the smaller managers that lack a global operating model.
Much then will change come next May. So as the world gears up for the US move to T+1, we asked BNP Paribas’ experts to examine the likely impacts on their regions.
Emmanuelle Riess, Global Custody Product Manager
The United States’ transition to T+1 on 28 May 2024 will follow the Memorial Day weekend. Mexico is working toward a T+1 migration at the same time as the US but no official date has been issued so far. Mexico had been on a T+1 settlement cycle previously, with the Indeval depository returning to T+2 in 2017 to be in line with the US. Canada will switch to T+1 on 27 May. Discussions about shifting to T+1 are also now taking place in other markets across the Americas, including Brazil.
The move to T+1 in the States, while a long time coming, was finally precipitated by two events. First was the volatility sparked by the outbreak of Covid-19. The second was the surge in interest in meme stocks such as GameStop and subsequent trading restrictions that undermined confidence in market integrity. Both highlighted potential liquidity and counterparty risk vulnerabilities in the US securities market that participants felt could be mitigated by shortening the settlement cycle.
The initial Securities and Exchange Commission draft rules proposed March 2024 for the T+1 transition, while the industry lobbied for September 2024. The May date stipulated in the final rules therefore came as something of a surprise to the industry and leaves limited time for participants to make the process and system changes required.
While the stock exchange 09:30-16:00 trading day will remain the same, most of the post-trade processing will have to happen on trade date if broker-dealers are to affirm the transactions by 21:00 as per the new rule. Transactions that miss the deadline and do not settle during the night-time cycle will incur higher DTCC charges. Registered investment advisors for their part have a new obligation to record the time and date of every confirmation, allocation and affirmation.
Automation and system enhancements will be needed to eradicate manual processes wherever possible to meet the compressed settlement timeframe, demanding significant industry investment in a short period. With a recent Value Exchange survey reporting that less than 50% of the industry has started work so far, much remains to be done. And not all participants will necessarily benefit from any efficiency-related cost reductions that do result.
International investors face even greater challenges. Some of the key cut-offs for European participants will be in the middle of the night, so they will have to re-think their operational models – perhaps moving the operations closer to their US execution teams, or have them work overnight to match US business hours. Funding and FX transactions will have to be reorganised as well to ensure cash is in the account on time.
Camille Papillard, Head of Financial Intermediaries and Corporates, EMEA
The T+1 discussions in continental Europe have only just begun, with AFME initiating a cross-industry taskforce in March to assess two key questions. First, does the cost-benefit analysis indicate Europe should move to T+1 settlement? If so, how and when should it happen? No timeframe has been specified for the taskforce report’s publication, but it will likely be some time in 2024.
Ultimately, Europe will be under pressure to align with other developed capital markets on T+1. We saw a similar process over the past decade, where markets with different settlement cycles in various parts of the world coalesced around T+2. Since some securities can be traded on both sides of the Channel and the Atlantic, the inefficiencies and arbitrage possibilities will make it difficult for Europe to stand alone on T+2.
Getting to T+1 will be complicated though. Unlike the US, Europe is not a single market with a harmonised legal framework and unified post-trade infrastructure. T2S does offer a common platform for the transfer of securities and cash between investors across 20 European countries, and can support a compressed settlement cycle. But Europe’s diverse markets still have a plethora of rules and operating nuances, with a fragmented trading, clearing and settlement environment boasting multiple CCPs and central securities depositories (CSDs).
The biggest challenge lies not in the settlement itself, but the upstream processes that must be compressed and automated across markets before settlement takes place. Delivering the necessary post-trade efficiencies and harmonisation will require concerted industry-wide collaboration encompassing all participants in the transaction chain, from investors and intermediaries to custodians and market infrastructures. Thousands of stakeholders will need to be involved to make it work right. Plus there is the question of which body would even drive the project.
The big danger is that moving to T+1 risks increasing the number of settlement fails, producing more inefficiency in Europe’s markets. That runs counter to the Central Securities Depositories Regulation’s (CSDR) aim of making securities settlement in the EU safer and more efficient to improve the attractiveness of the bloc’s capital markets. Reconciling T+1 with CSDR’s objectives will take time and extensive review to ensure any approach works for everybody.
In the meantime, European players investing into the US (and other T+1 markets) will need to get ready. More than 40% of our clients have indicated they are not yet prepared for the move, so the focus over the coming months must be on understanding how to manage their day-to-day.
Gabriel Sampaio, Head of Custody Solutions, UK & ME
The UK Chancellor of the Exchequer launched an Accelerated Settlement Taskforce on 9 December 2022 to examine the case for and practicalities of moving to a T+1 standard settlement period (and perhaps T+0 down the line) for financial trades in the UK. The work has been split into four streams: the processes different stakeholders must undertake to settle a trade; a cost-benefit analysis; a stakeholder feedback section; and what needs to change from a legal and regulatory perspective to make T+1 work. The taskforce is expected to publish its final report and recommendations this autumn.
The accelerated settlement topic forms part of the UK Government’s Edinburgh reforms, which seek to “drive growth and competitiveness in the financial services sector.” The Government is keen to demonstrate a ‘Brexit dividend’ that enables the UK to be more agile than the European Union. This political impetus suggests introducing T+1 is a fait accompli, with any move likely to be a question of ‘when’ rather than ‘if’.
At present, we are reaching out to different stakeholders and industry associations to ensure they are aware of the impending changes and what they need to do. Mapping internal processes to understand where the handoffs take place will be crucial, as will mapping all the interaction points with counterparties to see how they can work better.
We are also liaising with clients to gather their feedback and submit it to the taskforce. Funding and FX are at the forefront of discussions. Given the increased need for cash liquidity, will intraday and forward credit lines be widely available across the market, and how will it be priced at a time when the cost of financing has soared? Pre-funding is another topic.
The further away from the domestic market, the more concerns centre on the timeframe clients will have to act, such as when exceptions are raised during out of office hours for Asian institutions. The prospect of an uptick in settlement fails is also focusing attention on the CREST settlement discipline regime and whether its penalty practices should be reviewed. The continued existence of physical certificates and cheques will need to be addressed too.
Mark Wootton, Regional Head of Local Custody and Clearing, Asia Pacific
India’s exchanges completed the phased monthly transition from T+2 to T+1 in January 2023, joining China, where stocks on the exchange markets settle T+0 for securities and T+1 for cash. Initial feedback indicates the T+1 implementation in India has been a success, producing efficiencies and no significant issues.
Most other markets in the region remain on T+2, with no indication as yet that will change. Moves in the Americas and UK, and the discussions starting in Europe, may push the Asia Pacific exchanges to follow suit at some stage, with Hong Kong Exchanges and Clearing (HKEX) a prospective front-runner, especially as Stock Connect is T+0 today. For the moment though, the likelihood is the markets will wait to see how the moves in India and North America bed in, with industry consultations on T+1 potentially becoming more serious towards the end of this year.
The benefits of T+1, especially for banks and brokers, are well understood across the region. Moving though will be challenging. The large number of markets are even more fragmented than in Europe. More fundamentally, the world clock is against APAC.
Australia and New Zealand are nearly a day ahead of large parts of the globe, making T+2 effectively T+1.5 for the rest of the world. The time difference between Australia and the US eastern seaboard is 14 hours, with 17 hours to the West Coast, so a US investment manager investing into Asia has lost nearly a day when it trades. Settlement in Australia at present occurs in a single batch at 11:30. Would a later batch be necessary in a T+1 environment? Would single batch settlement even work?
The trade matching, processing and settlement are fairly standard processes and are not seen as insurmountable challenges. The more critical issue will be the cash component and funding trades in multiple, mostly exotic currencies in a squeezed window.
In India, the initial plan to become a pre-funded market would have made entry for offshore investors far more complex. After considerable lobbying, the decision was made to move the FX process to as late as possible at the end of trade date to accommodate European and US clients. Markets moving to T+1 elsewhere in the region may need to adopt a similar model.
The US move to T+1 raises similar issues for APAC investors. While tending to focus primarily on their domestic markets, the US is their second biggest target. Since investment managers are using domestic currencies to fund those US transactions, T+1 settlement in the US will force them to be more proactive around their FX and hedging processes.
Let us look at American Depositary Receipts (ADRs) as an example. Once the US shortens its settlement cycle, the ADRs will settle on T+1, whereas the underlying foreign shares will settle on T+2, bringing some challenges.
US T+1: get the full picture
How BNP Paribas can help clients navigate change
In our role as a large global custodian, we are communicating with clients and organising webinars and roundtables to help inform them about the changes and what they must do to prepare. By leveraging our contacts with exchanges, regulators and market advocacy groups around the world, along with our wide-reaching knowledge and skillsets as a premier global financial institution, we are working to support clients’ interests and provide ongoing insights where they need it.
From a solution perspective, we have products available to help deliver ease of settlement and access in a T+1 world.
Our Execution-to-Custody model enables us to execute transactions globally on clients’ behalf. Once the broker has the confirmation, it sends us the instruction based on the trade details. In the US, we automatically match the instruction with the broker confirmation at DTCC. If the transaction matches, it is sent for settlement. This saves European clients in particular from having to send us the trade instructions for matching in the middle of the night. They then receive the settled position directly into their custody account.
Clients can also leverage our outsourcing services. On the buy-side, our middle-office outsourcing can support asset managers and asset owners with multi-asset trade management, including trade capture and confirmation, settlement instruction, failed trade resolution, and investment record-keeping services, removing much of the operational workload from clients. For the sell-side, we can capture the execution feed from clients, carry out the books and records accounting for those brokers, create the settlement instructions and perform the netting as per their rules.
In addition, our dual operational teams, based in the US and Portugal, provide a highly efficient follow-the-sun model that allows us to service different markets across multiple time zones day and night. Having the team in Europe, for example, means any unmatched transactions or exceptions can be worked on early in the morning before the US day starts to get them ready for settlement on T+1. We are also well connected with DTCC and the solutions it offers, including the ALERT platform to ensure we have accurate standing settlement instructions (SSIs) in place to guard against one of the most common causes of unmatched transactions.
Our global FX solutions provide (especially international) clients with further T+1 settlement support. An automatic FX facility is available as soon as clients execute and send us their transactions. Or we have on-demand FX offered by desks located around the world.
 DTCC proposes approach to shortening U.S. settlement cycle to T+1 within 2 years, Depository Trust & Clearing Corporation, 24 Feb 2021, https://www.dtcc.com/news/2021/february/24/dtcc-proposes-approach-to-shortening-us-settlement-cycle-to-t1-within-two-years
 T+1 Settlement in Europe: Potential Benefits and Challenges, Association for Financial Markets in Europe, September 2022, https://www.afme.eu/Portals/0/DispatchFeaturedImages/AFME_Tplus1Settlement_2022_04.pdf
 Game Stopped: How the meme stock market event exposed troubling business practices, inadequate risk management, and the need for legislative and regulatory reform, US House Committee on Financial Services, June 2022
 Financial Services: The Edinburgh Reforms, HM Treasury, 9 December 2022, https://www.gov.uk/government/collections/financial-services-the-edinburgh-reforms