T+1: Prepare for a Shorter Settlement Cycle

Overview—What is T+1?

T+1 is the shortening of the settlement cycle in the securities industry from two days (T+2) to one day (T+1) to provide investors with quicker access to their funds and to reduce risks across the market.

On February 15, 2023, the Securities and Exchange Commission (SEC) announced that in May 2024, the U.S. (28 May), Canada and Mexico (27 May) will transition to T+1. All financial institutions that trade in these markets will need to prepare for the reduced settlement timeframe.

Why is T+1 being introduced?

Most markets have already been gradually reducing settlement cycles by operating at T+2. It is anticipated that the move to T+1 will:

• Reduce the number of unsettled trades outstanding at any given time
• Force process innovation—encourages trades to be booked correctly on trade date and streamlines matching processes
• Reduce period for market price fluctuations—expected reduction in variation margin calls, likely resulting in cost savings
• Reduce risk—reduces credit, market and liquidity risk arising from unsettled trades

Who does it apply to?

Financial firms that operate in the U.S., Canada and Mexico markets will be impacted, regardless of where they are based around the world. After the transition to T+1, the shorter timeframes for funding and processing in U.S. markets will have an outsized impact on those based in time zones ahead of the U.S.

Other jurisdictions such as the UK and EU are expected to move to T+1 in the future. More information on this can be found below.

Key Impacts

All impacted firms must ensure they are prepared and have made the necessary operational changes and technological upgrades required to settle trades in one day.

Operating Hours

Moving to T+1 may mean some firms will need to adapt work schedules for their teams and adjust how they communicate up and down the value chain to align to the new, shortened timeframe to the post-trade process.

Several firms have implemented a ‘follow-the-sun’ model across their trading desks, introducing global workflows that ensure the shortened settlement timeline can be met across different time zones.

Operational Procedures and Systems

It will be equally important to adapt back-office operations to maintain the pace of settlement and clearing activity. Buy-side firms should upgrade legacy systems and processes that might not be able to support trading, settlement and clearing on a T+1 basis as this can introduce operational risk.

Time Zones

Around 43 percent of U.S. securities are held by foreign investors¹, making it clear that firms around the world will need to consider how they must adapt their settlement procedures. To get an idea of the scale of this change, it is estimated that moving to T+1 will see an 85 percent reduction² in time to match and settle trades. 

Firms may have playbooks from the previous transition from T+3 to T+2, which will be helpful to revisit, but the move to T+1 is far more significant because of the extent to which it will reduce post-trade processing times. Some regions—notably in Asia—may be operating on a T+0 basis due to time differences.

Change to U.S. Affirmation Rules and Matching Processes

A trade affirmation, when two parties agree on the conditions and agreements of an exchange, is an important part of the trade. In moving to a reduced settlement cycle, a new regulatory requirement in the U.S. (SEC Rule: 15c6-2), means the affirmation must be performed before 9 p.m. U.S. Eastern time on the day of the trade. Due to the reduced settlement cycle, market participants will also need to ensure that trades are pre-matched in a timely manner to prevent settlement fails.

Communication

Communication along the entire chain needs to be in focus across the market, from custodians to counterparties to clients—all of which will be key to ensure the post-trade processes run as smoothly as possible.

The UK and EU’s Transition to T+1

Though the UK and EU have not yet confirmed plans to transition to T+1, the two jurisdictions are currently consulting on the scope and timing to move to a reduced settlement cycle.

Europe has a complex post-trade landscape with multiple market infrastructures to consider and several currencies, providing a challenging backdrop in which to transition.

There is a real possibility that the UK and EU may not be aligned in their respective approaches to T+1, and that the shift could occur at different times. All firms trading in UK and EU securities should therefore be thinking about the different moving parts involved in a potential staggered UK-EU shift, and what this will mean for their trade and post-trade processes.

In December 2023, the UK’s Accelerated Settlement Taskforce proposed a phased approach to improve operational processes prior to the migration to T+1 and made it clear that there was no consensus on a date for the UK to transition to T+1. Additionally, the Taskforce noted the importance of monitoring how the shortened settlement timeline lands in the U.S. and Canada in May 2024 to help frame when and how the UK makes the move.

Pershing EMEA will continue to engage with trade associations on both the EU and UK’s approach to T+1 and is also participating in the UK Taskforce to bring the latest updates to impacted firms.

Linda Gibson, Head of Regulatory Change (February 2024)

The move to T+1 is a significant operational change for the industry, no matter where firms are based. There is not a straightforward solution that firms can implement to make themselves T+1 compliant. Firms will need to make operational changes with the understanding that operational resilience is high on the regulatory agenda. In fact, it is on a parallel footing now to financial resilience, and regulators will want to see positive outcomes.

The move to T+1 ultimately aims to provide investors with quicker access to their funds and reduce market risks. At Pershing EMEA, we have noted that this shift in expectation is already leading to a rise in back and middle-office outsourcing, as firms look for ways to improve operational efficiency and ultimately remain competitive.

Pershing EMEA and the wider BNY Mellon group are actively participating in the industry dialogue to the UK and the EU’s approach to T+1, including the scope and the risks of the UK and EU not aligning. Watching how T+1 lands in the U.S. will be key to informing this discussion.