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 settlement – global learnings for the APAC region
For an in-depth look at the implications of T+1 for the European region, read our dedicated article: T+1 in Europe: what’s next for the EU and the UK?