The world is moving to T+1 settlement. However, how and when this can be achieved varies considerably from market to market. Markets face different challenges and will have to adopt plans appropriate for their circumstances. Each market is at a different stage of the journey.
The US has, of course, made the transition. It was a success. However, many participants (particularly those located outside the US) report that their costs have increased. Their challenge is now to automate and adapt processing.
Within Europe, the UK has a good transition plan. However, it is yet unclear if the UK infrastructures will step forward and provide the leadership needed for this plan to be executed. The EU and Switzerland face a more challenging task due to the complexity of their post-trade processes and the number of infrastructures involved. Consequently, moving to T+1 throughout Europe may take a little longer than some envisage.
In the Asia Pacific region, the discussion is well underway. Australia is amongst the first to assess what is possible and to discover that the transition will have to be after the upgrade of their settlement system. The need to schedule market changes carefully is likely to be a recurring theme as T+1 plans are considered.
Explore by region
T+1 in the Americas
Emmanuelle Riess, Global Custody Product Manager
At the end of May 2024, the US and a number of countries across the Americas (Argentina, Canada and Mexico) successfully moved to a T+1 settlement cycle.
The ambitious US timeframe (circa 15 months from when the T+1 rules were announced to go-live) required intense preparatory work from all market participants. We have taken an active role in helping the industry, particularly international participants, meet this demanding schedule. This has included an extensive education and engagement campaign, reviewing operating models to increase automation and thorough testing with the Depository Trust & Clearing Corporation (DTCC).
For the transition weekend, we opened 24/7 internal and external connectivity channels to manage any critical issues. Our systems have been operating without delays or outages since Day 1. However, the DTCC experienced an issue during the night cycle of 28 May 2024. Whilst this was quickly remediated, it further highlighted the importance of resiliency in a compressed lifecycle. The impact of the issue was minimalised as we handled it through our Lisbon dual office and communicated with clients during EMEA hours. Our follow-the-sun model with dual operating between the US and Lisbon is key to supporting our global clients.
Most industry metrics indicate that the move to T+1 in the US has improved post-trade processing:
- A DTCC analysis of affirmation rates shows that the transition has encouraged market participants to adopt best practices. Firms now affirm trades earlier on trade date, reaching an overall affirmation rate of 95% (stable since 29 May 2024), ahead of DTCC’s 90% recommendation, and compared with 73% in January 2024. We have doubled our affirmation rate since January
- Fail rates appear to be slightly lower compared to the averages observed in May 2024 in a T+2 settlement cycle. On 29 May, the first day of T+1 settlement, the Continuous Net Settlement (CNS) fail rate was 1.9% (vs. 2.01% before), and the Depository Trust Company (DTC) non-CNS fail rate was 2.92% (vs. 3.24% before)
- Improved liquidity (resulting from decreased pre-settlement risk): the National Securities Clearing Corporation (NSCC) Clearing Fund decreased by 23% compared to the prior quarter, from USD 12.8 billion to USD 9.8 billion, a USD 3 billion reduction
The industry was expecting the transition to cause negative “knock-on” impacts across funding, FX, securities alignment and lending. So far, the problems which have materialised have been fewer than anticipated. This may be partly due to the “hypercare” mode being extended well into June (e.g., increasing USD balances, extra staffing and oversight).
Whilst market participants are still learning from the US transition, there are aspects of the US markets and approach that are acknowledged as contributing to a successful move.
- Although it is large, the US market structure and the roles and responsibilities of the regulators and infrastructures are comparatively clear and simple. The regulators and infrastructures, particularly the DTCC, displayed purpose and leadership.
- In addition to the new rules, the DTCC’s pricing policy was aligned to incentivise participants to effect tasks earlier (e.g., the cost of settling transactions on T is many times less expensive than settling on T+1)
T+1 in the Asia Pacific region
Mark Wootton, Regional Head of Local Custody and Clearing, Asia Pacific
With Argentina, Canada, Mexico and the US having successfully transition to a T+1 settlement cycle, discussions in Asia Pacific have refocussed on whether markets should shorten their settlement cycles. The situation varies dramatically across markets.
In Australia, discussions regarding T+1 settlement are gathering momentum. The Australian Securities Exchange (ASX) conducted a quick survey towards the end of 2023 and, since December 2023, has had a T+1 Advisory Committee (of which we are a member). This reports into the ASX Business Committee (of which we are also a member). The T+1 Advisory Committee prepared a whitepaper and consultation which was published in April with responses due by June 2024. Key considerations of the paper are avoiding clashes with the CHESS (the clearing and settlement platform) replacement project and the geographical time zone challenges facing international investors. The ASX published a summary of responses in August 2024 and will define the next steps, if any, in November 2024.
The ASX consultation shows that whilst there is industry consensus that the market should move to T+1, the replacement of CHESS, is the priority. Furthermore, the move to T+1 and the CHESS replacement should not be simultaneous. The CHESS replacement project is a two-phased approach. The first of these phases will be in 2026 with the second phase, which is subject to market consultation, likely to occur during 2028 or 2029. Consequently, any decision to move to T+1 will require careful coordination, planning and resourcing and may be delayed to 2030.
Furthermore, foreign investors already face time zone challenges when transacting in Australia. These would be further exasperated with T+1 settlement as the current settlement cut-off of 11.30am AEST would not work in a compressed settlement cycle.
Over the Tasman, the New Zealand Stock Exchange (NZX) has also surveyed participants. Given the inherent links to the ASX, and the many securities dual listed across both markets, the NZX has agreed that any ASX move should be synchronised with the NZX.
India’s successfully moved to T+1 at the start of 2023. In March 2024, the Securities and Exchange Board (SEBI) introduced Phase 1 of their T+0 settlement initiative. This will be optional and run in parallel to the existing T+1 settlement cycle for the equity cash markets. Phase 1 excludes clients that are required to use custodians (e.g., Foreign Portfolio Investors) and will be limited to just 25 securities. Although T+0 settlement for the local retail market is gathering traction, offshore investment stays pinned to the T+1 settlement regime, mainly due to the funding requirements of a restricted currency.
The Monetary Authority of Singapore (MAS) reached out to the Central Depository (CDP) to understand the views of the depository agents (custodians with a SGX membership allowing them to deal with the CSD) on Singapore adopting a T+1 settlement cycle. Post-trade participants are not keen to shorten the cycle due to the operational challenges (especially for international relationships). The industry requested that the MAS and the CDP take a cautious approach to T+1.
Elsewhere in the region there has been less focus on shortening settlement cycles. However, the success of the Americas’ move may now act as a catalyst for change.
For an in-depth look at the implications of T+1 for the Asia Pacific region, read our dedicated article
T+1 in the European Union and Switzerland
Camille Papillard, Head of Financial Intermediaries and Corporates, EMEA
Discussions regarding shortening the settlement cycle are progressing across Europe. The Association for Financial Markets in Europe (AFME) has been prominent in a cross-industry task force which was reactivated in March (following a self-imposed lull, to allow members to focus on responding to the European Securities and Markets Authority’s (ESMA) Call for Evidence). Now the task force is analysing the challenges and potential impacts of a move to T+1. It is also considering the changes required prior to such a transition. Its findings will be published in a report which is expected in the fall of 2024. Meanwhile, ESMA’s final report is expected by January 2025, and it should include a cost/benefit analysis.
Whilst the many interdependencies of the international capital markets may encourage the EU and Swiss markets to follow the UK in aligning with the US, this is a complicated task as the EU is not a single market with a harmonised legal framework and unified post-trade infrastructure. Although TARGET2-Securities (T2S) (the European Central Bank’s common platform for the transfer of securities and cash) already supports compressed settlement cycles, Europe’s markets remain diverse. They still have a plethora of rules and operating nuances, with a fragmented trading, clearing and settlement environment boasting multiple central counterparties (CCPs) and central securities depositories (CSDs).
The biggest challenges are not in settlement, but in the upstream processes that must be compressed and automated prior to settlement. 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. Moreover, it is not clear who would lead the project; there is no European DTCC.
The big danger is that moving to T+1 increases settlement fails and decreases efficiency. That would run 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 capital markets). In Europe, implementing T+1 is a complicated endeavour, requiring a thorough and extensive review, well beyond settlement.
T+1 in the United Kingdom
Sonal Meghani, Financial Intermediaries Segment & Regional Strategist
On 9 December 2022, the UK Chancellor of the Exchequer launched an Accelerated Settlement Taskforce to examine the case for, and the practicalities of, moving to a T+1 standard settlement period. Charlie Geffen was appointed as chair of the taskforce and a report was published in March 2024. The report’s recommendations were all endorsed by the government.
The report recommends that the UK should move to T+1 no later than 31 December 2027 and that the UK should continue to explore opportunities for close collaboration with the EU and other European jurisdictions (e.g. Switzerland) to see if a move to T+1 can be coordinated together. In scope are securities trading on UK exchanges (physicals fall into the scope of The Digitisation Taskforce chaired by Sir Douglas Flint). OTC transactions, repos, and primary issuances are also excluded whilst funds are to be encouraged to move to T+2 for subscriptions and redemptions.
In January 2024, a technical group was established. This group is comprised of multiple workstreams covering all aspects of the trade lifecycle. Experts from both Securities Services and Global Markets at BNP Paribas are participating in the Technical Group, with representatives appointed within each workstream.
This group is tasked with developing the technical, operational and behavioural changes necessary for a smooth transition and to outline when these changes should be mandated to ensure that the transition is completed by 2025. The group should publish its report by the end of September 2024 which will be followed by a two-month consultation period with the UK transition date being set in December 2024.
Currently this group is actively reviewing the US experience; although we can learn a lot from this (e.g., preparation is key), the US and UK are very different markets, and a simple copy and paste will not suffice.
Another important task for the group is to clarify the “safe harbour” arrangements which would apply whilst the UK has a settlement cycle misaligned with the EU and Switzerland. These “safe harbour” arrangements are the provisions that would provide protection from legal or regulatory liability if specific standards or practices are adhered to (e.g., ETFs trading in the UK but settling elsewhere).
Euroclear UK & International (UK’s CSD) are working on a multi-year transformation programme to upgrade their settlement system (CREST) to a new modular technology platform; the timeline for transitioning to T+1 must take this into account.
Furthermore, the UK can use this transition as an opportunity to promote innovation, digitisation and efficiency across the market.
In preparation, we are focusing on:
- Engaging with stakeholders and industry associations across the industry lifecycle
- Liaising with clients to include their feedback with our own when engaging with the taskforce
- Looking into how the continued existence of certificates and cheques would impact the market as a whole and whether dematerialisation and electronic payments are a prerequisite
- Reviewing the importance of pre-funding
- Analysing the impact on overseas clients and how they may need to evolve their operating models (to avoid an increase in settlement fails, overdraft cost and issues with counterparts or underlying customers)
- Validating our current mapping of internal and market processes to define where changes might occur
- Ensuring ancillary services are reviewed as part of the process (e.g., funding, financing and securities lending) to ensure that the impact on liquidity levels and the associated costs are understood