Led by industry participants in the US, there have been growing calls for equity trades to settle on T+1. According to the US Securities and Exchange Commission (SEC) , the volatility caused by COVID-19 and the meme stock trading “highlighted the significance of the settlement cycle to the calculation of financial exposures and exposed potential risks to the stability of the US securities market.” 1
For example, the Depository Trust & Clearing Corporation (DTCC) processed a record 363 million equity transactions on March 12, 2020, which is roughly 15% higher than the 315 million trades processed during the last peak amid the financial crisis in October 2008.2
Since then, a chorus of high-profile US market leaders have recommended to the SEC that T+1 be adopted, something which the regulator has now acquiesced to. Accordingly, T+1 is poised to become reality in the US from March 2024. But what does this mean?
There are a number of pros to shortening the trade settlement cycle by one day, many of which have been articulated in “Accelerating the US Securities Settlement Cycle to T+1”, a thought leadership paper published jointly by DTCC, Deloitte, the Investment Company Institute (ICI) and the Securities Industry and Financial Markets Association (SIFMA).
“As the volume of unsettled trades over a single trading day and the time between trade and settlement is reduced, there will be a reduction in systemic, counterparty, and operational risk across the settlement ecosystem, particularly in periods of market volatility. Furthermore, T+1 settlement preserves the benefits of settlement netting at National Securities Clearing Corporation (NSCC) and, thereby, significantly reduces the volume of securities and currency required to be moved across markets on any given trading day,” highlights the white paper.3
The paper continues that a shorter settlement cycle would mean that trading firms have less market and counterparty risk during the settlement process. Consequentially, there will be a substantial reduction in margin that needs to be posted to NSCC. According to the DTCC, a move to T+1 could correspond to a 41% reduction in the volatility component of NSCC’s margin.4
This would allow “broker-dealers to better manage their capital and liquidity risks and better utilise their available capital. For investment funds, T+1 will align the settlement cycle of US mutual fund shares with the portfolio securities settlement cycle, thus improving cash and liquidity management,” adds the paper.5 T+1 could unlock other advantages, including further standardisation of capital markets and infrastructure modernisation, both of which will help generate efficiencies and deliver cost synergies.