The path to T+1
27 Nov 2024
Kamal Kannan, product and commercial director at S&P Global Market Intelligence, takes a look at the ripple effects and global impact of the move to T+1
Image: S&P Global Market Intelligence
The transition to T+1
On 27-28 May 2024, the US, Canada and several Latin American securities markets, including Jamaica, Peru, Argentina, Mexico, transitioned to an accelerated settlement cycle of one day after trade date (T+1), for specific instrument types.
The success of the transition is largely credited to the extensive preparatory efforts, including the formation of industry working groups, an extensive implementation playbook, comprehensive end-to-end testing, and coordinated education and communication across the global financial services community.
Notable results and benefits
The transition has yielded significant results particularly in reducing clearing margin requirements. In the US market, the National Securities Clearing Corporation (NSCC) Clearing Fund decreased by more than 28 per cent, dropping from US$12.8 billion to US$9.2 billion, resulting in a savings of US$3.6 billion. Same-day affirmation rates have reached 95 per cent of transactions by the 21:00 EST cutoff on the trade date. The average trade fail rate remained around 2.12 per cent for continuous net settlement trades (CNS) and 3.31 per cent for non-CNS trades in July 2024, consistent with T+2 settlement rates.
Challenges and ripple effects
While the transition is being viewed by many as a success, it has had a ripple effect in several areas — notably in funding, securities lending, and fund performance.
Costs related to FX spreads, pre-funding, margining, as well as unaffirmed trades, fail management, loan execution, and recall management, have all exceeded expectations.
Furthermore, full-time employee (FTE) costs, including those required on weekends, have also risen.
European Union-domiciled S&P 500 tracker funds and exchange traded funds (ETFs) experienced a 14 basis point lower return compared to their US domiciled counterparts.
Global preparation
Following the US market’s shift to a T+1 settlement cycle, other markets have begun preparing for shorter settlement periods or are at least in the discussion stage.
The primary reasons cited are to maintain a competitive edge, eliminate settlement cycle misalignments, and capitalise on the clear benefits of reduced margin requirements and enhanced post-trade automation.
UK and EU preparation
The UK Accelerated Settlement Taskforce (AST) is positioning the UK as the next major global market to adopt T+1 settlement with a 2027 transition using a phased and strategic approach.
Although the UK’s settlement market is similar to that of the US, the transition will still require significant preparation and coordinated testing.
The European Securities and Markets Authority (ESMA) is also facilitating a working group for the EU’s potential T+1 transition and has suggested a tentative timeline, aligned with the UK’s 2027 target. However, the fragmented nature of European markets, the complexity of multiple market infrastructures upgrades, and the planned integration with TARGET2-Securities, magnify the challenges and make the process far more difficult and complex.
Key factors for success
The successful transition of the US market to a T+1 settlement cycle can be primarily attributed to regulatory support and coordination of key market stake holders.
The US regulatory bodies, such as the US Securities and Exchange Commission (SEC), along with the Securities Industry and Financial Markets Association (SIFMA), the Investment Company Institute (ICI), and The Depository Trust & Clearing Corporation (DTCC), have all played a pivotal role in driving the T+1 transition and adoption. Together they have provided clear guidelines, set timelines, and facilitated industry-wide collaboration.
In contrast, currently no single entity within the UK or EU markets has taken full responsibility for overseeing this significant market shift. It is crucial to design a well-structured roadmap for T+1, with proper planning, coordination, and leadership to ensure a smooth and successful transition. Given that the UK/EU has shifted from asking ‘if’ to ‘when’ the transition will happen, now is the time to move past the question of who will lead it.
The relevant regulatory bodies and market infrastructure providers need to step up and spearhead the transition, while market participants and technical committees can provide the details on how the transition should unfold.
Preparing for the future
The transition to T+1 is ongoing, but the preparation must start now. Firms that saw T+1 as an opportunity to streamline and automate their post-trade operations, implemented standardised communication protocols, and analysed client behaviours/trade failure metrics, implemented effective intraday liquidity and positions inventory have reaped significant benefits.
S&P Global Market Intelligence’s role
At S&P Global Market Intelligence, we assist clients on their digital transformation journey with our Securities Processing Solution, delivering a smooth transition from legacy platforms to state-of-the-art technology solutions. We enable organisations to optimise their entire post-trade operation, while increasing straight-through processing (STP), and reducing the time, effort, and overall risk involved.
On 27-28 May 2024, the US, Canada and several Latin American securities markets, including Jamaica, Peru, Argentina, Mexico, transitioned to an accelerated settlement cycle of one day after trade date (T+1), for specific instrument types.
The success of the transition is largely credited to the extensive preparatory efforts, including the formation of industry working groups, an extensive implementation playbook, comprehensive end-to-end testing, and coordinated education and communication across the global financial services community.
Notable results and benefits
The transition has yielded significant results particularly in reducing clearing margin requirements. In the US market, the National Securities Clearing Corporation (NSCC) Clearing Fund decreased by more than 28 per cent, dropping from US$12.8 billion to US$9.2 billion, resulting in a savings of US$3.6 billion. Same-day affirmation rates have reached 95 per cent of transactions by the 21:00 EST cutoff on the trade date. The average trade fail rate remained around 2.12 per cent for continuous net settlement trades (CNS) and 3.31 per cent for non-CNS trades in July 2024, consistent with T+2 settlement rates.
Challenges and ripple effects
While the transition is being viewed by many as a success, it has had a ripple effect in several areas — notably in funding, securities lending, and fund performance.
Costs related to FX spreads, pre-funding, margining, as well as unaffirmed trades, fail management, loan execution, and recall management, have all exceeded expectations.
Furthermore, full-time employee (FTE) costs, including those required on weekends, have also risen.
European Union-domiciled S&P 500 tracker funds and exchange traded funds (ETFs) experienced a 14 basis point lower return compared to their US domiciled counterparts.
Global preparation
Following the US market’s shift to a T+1 settlement cycle, other markets have begun preparing for shorter settlement periods or are at least in the discussion stage.
The primary reasons cited are to maintain a competitive edge, eliminate settlement cycle misalignments, and capitalise on the clear benefits of reduced margin requirements and enhanced post-trade automation.
UK and EU preparation
The UK Accelerated Settlement Taskforce (AST) is positioning the UK as the next major global market to adopt T+1 settlement with a 2027 transition using a phased and strategic approach.
Although the UK’s settlement market is similar to that of the US, the transition will still require significant preparation and coordinated testing.
The European Securities and Markets Authority (ESMA) is also facilitating a working group for the EU’s potential T+1 transition and has suggested a tentative timeline, aligned with the UK’s 2027 target. However, the fragmented nature of European markets, the complexity of multiple market infrastructures upgrades, and the planned integration with TARGET2-Securities, magnify the challenges and make the process far more difficult and complex.
Key factors for success
The successful transition of the US market to a T+1 settlement cycle can be primarily attributed to regulatory support and coordination of key market stake holders.
The US regulatory bodies, such as the US Securities and Exchange Commission (SEC), along with the Securities Industry and Financial Markets Association (SIFMA), the Investment Company Institute (ICI), and The Depository Trust & Clearing Corporation (DTCC), have all played a pivotal role in driving the T+1 transition and adoption. Together they have provided clear guidelines, set timelines, and facilitated industry-wide collaboration.
In contrast, currently no single entity within the UK or EU markets has taken full responsibility for overseeing this significant market shift. It is crucial to design a well-structured roadmap for T+1, with proper planning, coordination, and leadership to ensure a smooth and successful transition. Given that the UK/EU has shifted from asking ‘if’ to ‘when’ the transition will happen, now is the time to move past the question of who will lead it.
The relevant regulatory bodies and market infrastructure providers need to step up and spearhead the transition, while market participants and technical committees can provide the details on how the transition should unfold.
Preparing for the future
The transition to T+1 is ongoing, but the preparation must start now. Firms that saw T+1 as an opportunity to streamline and automate their post-trade operations, implemented standardised communication protocols, and analysed client behaviours/trade failure metrics, implemented effective intraday liquidity and positions inventory have reaped significant benefits.
S&P Global Market Intelligence’s role
At S&P Global Market Intelligence, we assist clients on their digital transformation journey with our Securities Processing Solution, delivering a smooth transition from legacy platforms to state-of-the-art technology solutions. We enable organisations to optimise their entire post-trade operation, while increasing straight-through processing (STP), and reducing the time, effort, and overall risk involved.
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